Chapter 4 Income Under the Head Salaries (4)

Income under the head salaries
Grade pay system

If an employee joins the service on 1.5.2015 and is
placed in the grade of Rs.12,200-300-17,400-500-
19,400.
This means basic salary 12,200 w.e.f. 1.5.2015.
He will get annual increment Rs.300 w.e.f. 1.5.2015 he
will get an annual increment of Rs.300 w.e.f. 1.5.2016
and onwards till his salary reaches Rs.17,400.
Thereafter he will get annual increment Rs.500 till his
salary reaches Rs.19,400. No further increment will be
given thereafter till he is placed in other grade.
1.5.2011 and is placed in the grade of Rs.12,200-300-
17,400-500-19,400,
1.5.2015 TO 12,200 24-25 14,600
30.4.2016
1.5.2016 TO 31.4.2017 12,500 25-26 14,900
17-18 12,800 26-27 15,200
18-19 13,100
19-20 13,400
21-22 13,7,00
22-23 14,000
23-24 14,300
Ill 4.1 X joins the service in the grade of 12,000-300-
13,800-400-17,800 on 1.6.2007. compute his basic
salary for the assessment year 2020-21.
Ans.1.6.2007 12,000, 31/5/2008
Year Salary p.m. Year Salary p.m.
1.6.2007 to 31.5.2008 12,000 p.m. 1.6.2014 to 31.5.2015 14,200
1.6.2008 to 31.5.2009 12,300 1.6.2015 to 31.5.2016 14,600
1.6.2009 to 31.5.2010 12,600 1.6.2017 to 31.5.2017 15,000
1.6.2010 to 31.5.2011 12,900 1.6.2017 to 31.5.2018 15,400
1.6.2011 to 31.5.2012 13,200 1.6.2018 to 31.5.2019 15,800
1.6.2012 to 31.5.2013 13,500 1.6.2019 to 31.5.2020 16,200
1.6.2013 to 31.5.2014 13,800 1.6.20 to 31.5.2021 16,600
Points to consider:
a) Salary income is chargeable to tax on “due basis” or
“receipt basis” whichever is earlier.
b) Existence of relationship of employer and employee is
must between the payer and payee to tax the income
under this head.
For e.g. In the case of a lecturer of a college who is also
appointed vice-principal of the college and gets vice-
principal allowance would be taxed under the head
“salaries” because it is being received from the employer
by the employee although for non-academic work.
However if the lecturer sets question paper of a
university, the remuneration which he receives for setting
the paper will not be taxable under the “Salaries” as the
A member of Parliament or State Legislature is not a
Government employee and therefore,
remuneration received by him is not taxable as
salary income, but as income from other sources.
However, salary received by the Minister in the
government is taxable under the head salary.
Any salary bonus, commission or remuneration due
to/received by as assessee from a firm, in which he
is a partner, shall not be taxable under the head
salaries as there is no employer-employee
relationship.
c) Income from salary taxable during the year shall
consists of following:
i. Salary due from employer (including former employer)
to taxpayer during the previous year, whether paid or not;
ii. Salary paid by employer (including former employer) to
taxpayer during the previous year before it became due;
iii. Arrear of salary paid by the employer (including former
employer) to taxpayer during the previous year, if not
charged to tax in any earlier year;
Exceptions – Remuneration, bonus or commission
received by a partner from the firm is not taxable under
the head Salaries rather it would be taxable under the
head business or profession.
Salary income is chargeable to tax on “due basis” or “receipt
basis” whichever is earlier.
If the salary is payable on monthly basis, it is normally
becomes due at the end of the month although it is paid
in the next month. In this case, it will be taxable on ‘due’
basis because ‘due’ is earlier than ‘receipt’. Therefore,
salary is normally taxable from April to March as the
salary of March becomes due at the end of the month.
However, in some cases the salary becomes due on the 1st
day of the next month. In that case we shall tax the salary
from March to February because salary of month of
March of current year will be due only in the next financial
year and the salary of month of March of last previous
year become due only on 1st April of the current year.
Ill.4.2 X is an employee of ABC Ltd. Getting a salary of 40,000
p.m. Which is due on the last day of the month but is paid on
the 7th of next month. Salary for which months will be taxable
for assessment year 2024-25?
Ans. April 2023 to 31.3.2024
Ill. 4.3 in the above case, assume that salary becomes due on the
1st of next month and is paid on the 7th of the next month.
Salary for which months will be taxable for the assessment
year 2024-25?
Ans. 31.3.2023 to 29.2.2024
Ill. 4.5 in the above case, assume that he is paid the salary of
April, may 2023 in advance in march , 2023. what will be his
gross income for the assessment year 2024-25? Py 2023-24
Ans. Salary for the month of 1.4.2023 to 31.3.2024 = 4,80,000
Advance salary of 1.4.2023 and 1.5.2023 received in march 2023.
1st of next month and is paid on the 7th of the next
month. Salary for which months will be taxable for the
assessment year 2023-24?
Assessment year 2024-25
Previous year 2023-24 due receive date
April 1 May 2023 6 may
May 1 June 6 June
June 1 July 6 July
July 1 aug 6 aug
Aug 1 sep 6 sep
Sep 1 oct 6 oct
Oct 1 nov 6 nov
Nov 1 dec 6 dec
Dec 1 jan 2024 6 jan 2024
Jan 1 feb 6 feb
Feb 1 march 6 march
March 1 april 6 April 2024
Continue
Assessment year 2024-25
Previous year 2023-24 due receive date
April 2023 1 may 2023 6 may 2023

May 1 June 6 june
June 1 July 6 july
July 1 august 6 aug
Aug 1 sep 6 sep
Sep 1 oct 6 oct
Oct 1 nov 6 nov
Nov 1 dec 6 dec
Dec 1 jan 2024 6 jan 2024
Jan 2024 1 Feb 6 feb
Feb 1 march 6 march
march 1 april 6 april
Place of accrual of salary:
a) Salary accrues where the services are rendered
even if it is paid outside India;
b) Salary paid by the Foreign Government to his
employee serving in India is taxable under the head
Salaries;
c) Leave salary paid abroad in respect of leave
earned in India shall be deemed to accrue or arise in
India.
Exceptions – If a Citizen of India render services
outside India, and receives salary from Government of
India, it would be taxable as salary deemed to have
accrued in India.
4.3 Salary is defined to include:
a) Wages
b) Annuity
c) Pension
d) Gratuity
e) Fees, Commission, Perquisites, Profits in lieu of or in
addition to Salary or Wages
f) Advance of Salary
g) Leave Encashment
h) Annual accretion to the balance of Recognized Provident
Fund
i) Transferred balance in Recognized Provident Fund
j) Contribution by Central Government or any other employer
to Employees Pension Account as referred in Sec. 80CCD
Treatment of various incomes to be included in
gross salary
Wages:- no difference between salary and wages.
Taxable on the same basis as salary.
Annuity:- annual grant made by an employer falls
under salaries. It may be paid by present employer;
it is taxable as salary. If it is received from a former
employer, then it is taxed as profits in lieu of salary.
Bonus:- taxable on receipt basis. Included in gross
salary.
Salary in lieu of notice period:- taxable in the
previous year in which it is received.
Fee and commission:- paid/payable by the employer
to the employee shall be fully taxable and thus would
include in Gross Salary. Commission may be fixed
amount or a fixed % of turnover or net profit etc.
Overtime payment:- included in gross salary.
Salary chapter divide in to 3 parts:-
1. Allowances
2. Perquisites
3. Retirement benefits
Allowances
Allowance is defined as a fixed monetary amount
paid by the employer to the employee for meeting
some particular expenses, whether personal or for
the performance of his duties.
These allowances are generally taxable and are to be
included in the gross salary unless a specific
exemption has been provided in respect of any such
allowance.
Specific exemptions in respect of allowances are
provided under the foll. Sections:
i. House rent allowance
ii. Prescribed special allowances
4.12 House Rent Allowance [w.e.f. A.Y. 2021-22,
exemption under section 10(13A) shall not be
allowed, if the employee opts to be taxed under
section 115BAC]
House rent allowance
Least of the following is exempt:
a) Actual HRA Received
b) 40%/50% of Salary (50%, if house situated in Mumbai,
Calcutta, Delhi or Chennai)
c) Rent paid minus 10% of salary (rent paid – 10% of salary)
* Salary = Basic salary + DA (if part of retirement benefit /
forming part of salary/terms of employment) + fixed
Turnover based Commission
Note:
i. Fully taxable, if HRA is received by an employee who is living
in his own house or if he does not pay any rent.
ii. It is mandatory for employee to report PAN of the landlord
to the employer if rent paid is more than Rs.1,00,000 [Circular
Ill A is entitled to a basic salary of Rs.50,000 p.m. and
dearness allowance of Rs.10,000 per month, 40% of
which forms part of retirement benefits. He is also
entitled HRA of Rs.20,000 p.m. he pays Rs.20,000 p.m.
as rent for a house in Delhi. Compute the taxable HRA.
Ans. Actual HRA received(20,000×12) 2,40,000
Rent paid- 10% of salary(2,40,000- 64,800) 1,75,200
50% of salary 3,24,000
2,40,000 – 1,75,200 = 64,800 included in Gross salary.
Salary include:- 50,000×12 + 40% of 1,20,000 = 6,48,000
Hra receive 2,40,000
Less exempt H.R.A 1,75,200 64800
Ill 4.6 A is entitled to a basic salary of Rs.25,000 p.m. and
dearness allowance of Rs.5,000 per month, 40% of which
forms part of retirement benefits. He is also entitled HRA of
Rs.10,000 p.m. he pays Rs.10,000 p.m. as rent for a house
in Delhi. Compute the taxable HRA.
Ans. Exempted HRA 87,600.
HRA received 1,20,000
Exempted HRA 87,600
REST BALANCE INCLUDED IN GROSS SALARY 32400
Salary = basic salary + D.A. + TURNOVER BASED
COMMISSION
= 25,000 × 12 + 5,000 × 12 0F 40%
= 3,00,000 + 60,000 × 40%
= 3,00,000 + 24,000
b) 40%/50% of Salary (50%, if house situated in
Mumbai, Calcutta, Delhi or Chennai)
c) Rent paid minus 10% of salary (rent paid – 10% of
salary)
A] 10,000 × 12 = 1,20,000
B] 3,24,000 × 50% = 1,62,000
C] 10,000 × 12 – 10% × 3,24,000
1,20,000 – 32400 = 87, 600
Actual HRA – LEAST AMOUNT EXEMPT
1,20,000 – 87,600 = 32,400
Ill 4.7 (where there is change in the rent)
X is employed at Delhi as the finance manager of R co. Ltd. The
particulars of his salary for the previous year 2023-24 are as
under:-
(i) Basic salary 30,000 p.m.
(ii) Dearness allowance (forming part of basic salary) 10,000
p.m.
(iii) Conveyance allowance for personal purpose 5,000 p.m.
(iv) Commission @2% of the turnover achieved which was
Rs.22,50,000 during the previous year and the same was
evenly spread. 45,000
(v) House rent allowance 15,000 p.m.
The actual rent paid by him Rs.10,000 p.m. for an
accommodation at Noida till 31.12.2023 from 1.1.2024 the rent
was increased to Rs.20,000 p.m. compute the taxable HRA.
Salary = basic salary + D.A. + FIXED TURNOVER
BASED COMMISSION 45,000 × 9/12
SALARY FOR 9 MONTHS = 30,000 × 9 + 10,000 × 9 +
45,000 × 9/12
= 2,70,000 + 90,000 + 33,750 = 3,93,750
SALARY FOR 3 MONTHS = 30,000 × 3 + 10,000 × 3 +
45,000 × 3/12
= 1,31,250
HR for 9 months
b) 40%/50% of Salary (50%, if house situated in Mumbai,
Calcutta, Delhi or Chennai)
c) Rent paid minus 10% of salary (rent paid – 10% of
salary)
A] 15,000 * 9 = 1,35,000
B] 40% of 3,93,750 = 1,57,500
C] 10,000 * 9 – 10% of 3,93,750 = 50,625
1,35,000 – 50,625 = 84,375
HRA RECEIVE 15,000 * 12 = 1,80,000
LESS: EXEMPT HRA (50,625 + 45,000) = 95,625 84,375
ILL.4.8 Mr. X is employed with ABC Ltd. On a basic
salary 60,000 p.m. he is also entitled to a D.A. of
20% of basic salary. 70% of the D.A. is included in
salary for retirement benefits. HRA receive 30,000
p.m.
With effect from 1.1.2024, he receives an increment
of 10,000 in his basic salary.
Arrears of salary for previous year 2023-24 is 80,000.
X was staying with his parents till 31.10.23. from
1.11.20, he takes an accommodation in Delhi and
PAYS 25,000 P.M. AS RENT FOR the accommodation.
Compute his HRA for the assessment year 2024-25.
Ans. (i) since no rent has been paid from 1.4.2020 to 31.10.2020, no
exemption shall be available.
(ii) Amount
a Actual HRA received (30,000 × 2) 60,000
b Rent paid – 10% of salary
50,000 – 10% of (1,20,000 + 16,800) i.e. 50,000 – 13,680 36,320
c 50% of salary
1,36,800 of 50% 68,400
36,320 will be Exempt
a Actual HRA received (30,000 × 3) 90,000

(iii)
b Rent paid – 10% of salary
75,000 – 10% of (2,10,000 + 29,400) i.e. 75,000 - 23,940 51,060
c 50% of salary 50% of 2,39,400 1,19,700
51,060 will be Exempt
Total H.R.A 30,000 × 12 = 3,60,000

Less: exempted H.R.A 36,220 + 51,060 = 87,380 2,72,620
Problem 2:- R is employed with XY Ltd. on a basic salary
of 5,000 p.m. He is also entitled to dearness allowance
@100% of basic salary, 50% of which is included in
salary for as per terms of employment. The co. Gives
him HRA of 3,000 p.m. Which was increased to 3,500
w.e.f. 1.1.2021. He also got an increment of 500 in his
basic salary w.e.f 1.2.2021. Rent paid by him during the
previous year 2020-21 is as under:
April and May, 2020 – Nil, as he stayed with his parents.
June to October, 2020 – 3,000 p.m. For an
accommodation in Ghaziabad.
November, 2019 to March, 2021 – 4,000 p.m. For an
accommodation in Delhi.
Compute his gross for assessment year 2021-22.
Ans. Taxable HRA has been computed as under:
(i) April to May, 2020 (fully taxable as no rent paid) 6,000
(ii) June to October, 2020
Actual amount received 15,000
Less: Exempt being minimum of following:
(a) Actual HRA received 15,000
(b) Rent paid - 10% of salary (15,000 - 3,750) 11,250
(c) 40% of salary 15,000
Taxable HRA 15,000 - 11,250 = 3,750
(iii) November to December, 2020
Less: Exempt being minimum of following
(c) 50% of salary 7,500
Taxable HRA 6,000 — 6,000 = 0
(iv) January, 2021
Less: Exempt being minimum of following:
(b) Rent paid - 10% of salary (4,000 - 750) 3,250
(c) 50% of salary 3,750
taxable HRA 3,500 - 3,250 = 250
(v) February and March, 2021
Less: Exempt being minimum of following
(c) 50% of salary 8,250
Taxable HRA 7,000 - 6,350 = 650
Total taxable = 3,750 + 250 + 650 + 6,000 = 10,650
Basic salary = 5,000 × 5 = 25,000
D.A. = 25,000 OF 50% = 12,500
MEANING OF SALARY = 37,500
1V
4.13 prescribed allowances which are exempt to a certain
extent[sec.10(14)]
(i) Specified allowance for performance of official duties:-
specifically granted to meet expenses wholly,
necessarily and exclusively incurred in the performance
of duties of an office or employment of profit. These
allowances will be exempt the extent such expenses are
actually incurred for that purpose.
(ii) Allowances which meet personal expenses:- these
allowances are granted to the employee to meet his
personal expenses either at the place where the duties
or employment of profit are ordinarily performed by
him or at the place where he ordinarily resides. These
allowances will be exempt the extent such expenses are
actually incurred for that purpose.
4.13a Special allowances which are exempt to the extent of
actual amount received or the amount spent for the
performance of the duties of an office or employment of
profit, whichever is less:-
Minimum of the foll. New tax regime benefit only first 3
points. Exemption Travelling, daily, conveyance allowance
(1) Actual allowance received
(2) Actual amount spent for the purposes of duties of office or
employment.
a) travelling allowance:- Exempt to the extent of expenditure
incurred for official purposes Travelling allowance to meet
the cost of travel on tour or on transfer.
b) Daily allowance:- Daily allowance to meet the ordinary
daily charges incurred by an employee on account of
absence from his normal place of duty.
(c) Conveyance allowance granted to meet the
expenditure on conveyance in performance of duties
of an office.
(d) Helper allowance:-
(e) Academic allowance:- encouraging academic,
research and training.
(f) Uniform allowance:-
4.13b allowances to meet personal expenses only syllabus mention you
have to done These allowances can be of the foll. Two types.
(1) Allowances which are exempt to the extent of amount received or
the limit specified, whichever is less.
(2) Allowances which is exempt to the extent of certain % of amount
received.
(1) Allowances which are exempt to the extent of amount received or
the limit specified, whichever is less.
(i) Children education allowance(syllabus):- 100 p.m. per child up to a
maximum of 2 children, whichever is less.
(ii) Hostel expenditure allowance(syllabus):- 300 p.m. per child
maximum of 2 children, whichever is less.
(iii) Tribal area, scheduled area/agency area allowance:- exemption up to
200 per month, whichever is less. (a) Madhya Pradesh (b) Tamil Nadu
(c) Uttar Pradesh (d) Karnataka (e) Tripura (f) Assam (g) West Bengal
(h) Bihar (i) Orissa
(iv) Special compensatory hilly area allowance or high altitude
allowance etc.:- exemption various 300 to 7,000 p.m.
(e)Border area, Remote Locality or Disturbed Area or
Difficult Area Allowance:- (Subject to certain
conditions and locations) Amount exempt from tax
varies from Rs.200 to Rs.1,300 per month
(f) Compensatory Field Area Allowance:- If this
exemption is taken, employee cannot claim any
exemption in respect of border area allowance
(Subject to certain conditions and locations) Up to
Rs.2,600 per month is exempt
(g) Compensatory Modified Area Allowance:- If this
exemption is taken, employee cannot claim any
exemption in respect of border area allowance
(Subject to certain conditions and locations)Up to
(h) Transport allowance given to certain disabled
person.(syllabus):- :- any transport granted to an
employee to meet his expenditure for the purpose of
commuting between the place of his residence and
the place of his duty, blind, orthopedically
handicapped with disability of lower extremities, is
exempt to the extent of Rs.3,200 p.m.. earlier
Omitted by notification no.17/2018, date 6.4.2018
due to notification of standard deduction u/s 16(ia)
50,000.
(j) Island Duty Allowance granted to members of
armed forces in Andaman and Nicobar and
Lakshadweep group of Island (Subject to certain
conditions and locations) Up to Rs.3,250 per month is
exempt
(k) High Altitude Allowance granted to armed forces
operating in high altitude areas (Subject to certain
conditions and locations)
a) Up to Rs.1,060 per month (for altitude of 9,000 to
15,000 feet) is exempt
b) Up to Rs.1,600 per month (for altitude above
15,000 feet) is exempt
(l) Special compensatory highly active field
allowance granted to members of armed forces:-
exempt up to Rs.4,200 p.m.
(m) Counter insurgency allowance granted to
members of armed forces:- exempt up to Rs.3,900
p.m.
(2) Allowances which is exempt to the extent of
certain % of amount received. NOT IN SYLLABUS
Allowance granted to an employee working in any
transport business to meet his personal expenditure
during his duty performed in the course of running of
such transport from one place to another place
provided employee to fixed allowance.
Amount of exemption shall be lower of following:
a) 70% of such allowance; or
b) Rs.10,000 per month.
Exempt to the extent of expenditure incurred for
official purposes
Ill 4.9 R is an receipt of the foll. Allowances from his employer
during the previous year 2023-24
(1) Conveyance allowance Rs.600 p.m. he spends Rs.5,000 during
the previous year for official purposes.
(2) Transport allowance Rs.2,200 p.m. for commuting from
residence to office and back. He spends Rs.1400 p.m. during the
year.
(3) Uniform allowance Rs.5,000 p.a. he spends Rs.4,000 on the
purchase and maintenance of uniform.
(4) Educational allowance and hostel expenditure allowance Rs.450
p.m. per child for 3 children.
(5) Personal assistant allowance Rs.2,000p.m. he engaged the
personal assistant for official work and paid him salary of
Rs.1,500 p.m. for 9 months. Personal assistant spends 60% of
his time for official work of R.
Compute how much of the above allowances are taxable.
Sol.
S.N Particulars Amount Amount 115BAC
o OLD TAX
1. Conveyance allowance 600 × 12 7,200
Less: exempt to the extent spent for official 5,000 2,200 2,200
purposes
2. Transport allowance 2,200 × 12 26,400 26,400
Less: exempt NIL 26,400
3. Uniform allowance 5,000 5000
Less: exempt to the extent spent for purchase 4,000 1,000
and maintenance of uniform
4. Education allowance 450 × 3 × 12 16,200 16200
Less: exempt 100 + 300 = 400 × 2 × 12 9,600 6,600
5. Personal assistance allowance (helper 24,000 24000
allowance) 2000 × 12
Less:- exempt to the extent spent for official 8,100 15,900
purposes
1500×9 = 13500@60%
Total taxable allowance to be included in gross 52,100 73,800
salary
Deductions u/s. 16
4.14 Treatment of Entertainment Allowance deduction under sec.
16(ii)
This deduction is allowed only to government employee. Non-
government employees shall not be eligible for any deduction on
account of any entertainment allowance received by them.
Deduction in respect of this is available to a government employee only
whichever is less.
i. Rs.5000/
ii. 20% of his salary exclusive any allowance, benefit or other
perquisites.
iii. actual amount received,
Sumptuary allowance has to be treated as an entertainment allowance.
Salary means basic salary.
Q. X, an employee of the central govt., gets Rs.30,000 p.m. as basic
salary and is entitled to Rs.1,500 p.m. as entertainment allowance.
Compute the deduction under sec. 16(ii) from gross salary.
Basic salary 30,000 p.m. *12 = 3,60,000
Entertainment amount 15,00 p.m.* 12 = 18,000
Gross salary = 3,78,000
Deductions u/s 16
Entertainment allowance (ii) = 5,000
Standard deduction = 50,000
Net salary = 3,23,000
whichever is less.
i. Rs.5000/
ii. 20% of his salary exclusive any allowance, benefit or other
perquisites.
iii. actual amount received,
I 5,000
Ii 20% 3,60,000 = 72,000
Q. R is employed as a pilot in Air India. He is in receipt
of the foll. During the previous year 20203-24:
1. Basic salary Rs.50,000 p.m.
2. Bonus 2 months of basic salary
3. Entertainment allowance Rs.1,500 p.m.
4. Uniform allowance Rs.1,200 p.m.
He has spent 8,000 for purchase and maintenance of
uniform for official purpose.
Compute his income under the head salary for the
assessment year 2024-25.
Basic salary 50,000* 12 = 6,00,000
Bonus 50,000*2 = 1,00,000
Entertainment allowance 15,00*12 = 18,000
Uniform allowance 12,00*12 = 14,400
Less actual amount spend = 8,000 = 6,400
Less deductions: u/s 16
Standard deduction = 50,000
Income from salary = 6,74,400
4.15 allowances which are exempt in case of certain
persons
i. Allowances to a citizen of India, who is a
government employee, rendering services outside
India.
ii. Allowances to high court judges under section 22A
(2) of the high court judges (conditions of service)
act, 1954.
iii. Sumptuary allowance/entertainment allowance
to high court judges/supreme judges
iv. Allowance received by an employee of UNO from
his employer.
4.16 allowances which are fully taxable
1. City Compensatory Allowance CCA
2. Dearness allowance DA
3. Medical Allowance: fully taxable, irrespective of
whether any amount has been spent on medical
treatment or not.
4. Tiffin, Lunch, Dinner or Refreshment Allowance
5. Servant Allowance
6. Warden allowance
7. Non – practicing allowance
8. Family allowance
9. Overtime Allowance
Ill 4.4.10 R furnishes you the foll. information for the previous year 2023-24:
Basic salary 15,000 p.m.
Dearness allowance 6,000 p.m.
60% of which is part of salary
Entertainment allowance 5,00 p.m.
House rent allowance 6,000 pm.
Actual rent paid for a house in Delhi 7,000 p.m.
Transport allowance for commuting from residence to office and back 2,400 p.m.
(he spends 1,400 p.m. For such purpose)
Medical allowance (he spends 5,000 for his medical treatment) 1,000 p.m.
Lunch allowance (he spends 2,000 for his lunch in the office) 200 p.m.
Education allowance for 3 children per child 200 p.m.
Compute taxable salary of R for the assessment year 2024-25. Compute how much of the
above allowances are taxable if R:
A) Does not opt to be taxed under section 115BAC
B) Does opt to be taxed under section 115BAC
Ans.
Particulars Amount Amount 115BAC
Basic salary 15000 × 12 1,80,000 1,80,000
Dearness allowance 6000 × 12 72,000 72,000
Entertainment allowance500 × 12 6,000 6,000
Education allowance for 3 children 200 × 12 × 3 7,200 4,800 7,200
Less exempt 100 × 12 × 2 -2400
Transport allowance 2400 × 12 28,800 28,800 28,800
Less: exempt NIL
Medical allowance 100 × 12 12,000 12,000 12,000
Less: exempt NIL
Lunch allowance 200 × 12 2,400 2,400 2,400
Less: exempt NIL
House rent allowance 6,000 × 12 72,000 10,320 72,000
Less: exempt - 61,680
Gross salary :- 3,16,320 3,80,400
Less: standard deduction 50,000 50,000
Less: deduction on account of entertainment allowance NIL -
Income under the head salary 2,66,320 3,80,400
Working notes:- DA 6,000 * 12 * 60% = 43,200
Treatment of HRA
Meaning of salary = basic salary + DA part of salary
= 1,80,000 + 43,200 = 2,23,200
Exempt minimum of the foll:
1. Actual HRA receive 6,000*12 72,000
2. Rent paid – 10% of salary
84,000 – 22,320 61,680
3. 50% of salary 2,23,200@50% 1,11,600
Exempted amount 61,680 included in the gross
salary
4.17 Perquisites.
Perquisites are benefits received by a person as a
result of his/her official position and are over and
above the salary or wages. These fringe benefits or
perquisites can be taxable or non-taxable depending
upon their nature.
e.g. Using a car offered by your employer or a house
provided by your employer could attract perquisite
tax since these amenities are made available to you
by your company over and above your salary.
Perquisites
Cash kind
“Perquisite” may be defined as any casual emolument or benefit
attached to an office or position in addition to salary or wages.
“Perquisite” is defined in the section17(2) of the Income tax Act as
including:
(i) Value of rent-free/concessional rent accommodation provided by
the employer.
(ii) Any sum paid by employer in respect of an obligation which was
actually payable by the assesse.
(iii) Value of any benefit/amenity granted free or at concessional rate
to specified employees etc.
(iv) 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 assesse.
(v) The amount of any contribution to an approved superannuation
fund by the employer in respect of the assesse, to the extent it exceeds
SEVEN lakh fifty thousand rupees; and
(vi) the value of any other fringe benefit or amenity as may be
Taxability of perquisites
Perquisites may be divided into 5 categories:-
(a) Perquisites which are taxable in the hands of all
categories of employees.
(b) Perquisites which are taxable only when the
employee belongs to a specified group i.e., he is a
specified employee.
(c) Specified security or sweat equity shares allowed
or transferred by the employer to the assesse.
(d) Contribution by the employer to the approved
superannuation fund in respect of assesse to the
extent it exceeds Rs.7,50,000
(e) Tax-free perquisites.
4.19 Perquisites which are taxable in the hands of all categories of
employees
Foll.
(i) Rent free accommodation provided by the employer to the
employee. Such accommodation may be furnished or unfurnished.
(ii) Any concession in the matter of rent in respect of the accommodation
provided or granted by the employer to the employee.
(iii) Any sum paid by the employer in discharging the monetary obligation
of the employee which otherwise would have been payable by the
employee. E.g., the school fees of the children of the employee paid by
the employer or the income-tax of the employee paid by the employer.
(iv) Any sum payable by the employer whether directly or through a fund
(other than RPF, approved superannuation fund or deposit linked
insurance fund) to affect an assurance on the life of the assesse or to
affect a contract for an annuity.
(v) The value of any other fringe benefit or amenity as may be prescribed.
4.20a Perquisites which are taxable only in the case of specified
employees.
Specified employees meaning:- any one condition
1) A director Employee- An employee who is 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 a substantial interest. A person has
substantial interest in the employer-company, if an employee having
20% or more of voting power in employer-company.
3) An employee drawing in excess of Rs 50,000 p.a.- An
employee drawing in excess of Rs 50,000 and does
not fall in above two categories. For computing the
limit of Rs.50,000
following are excluded/deducted:
a) Non-monetary benefits.
b) Standard deduction/ Deduction on account of
profession tax.
c) Exempt entertainment allowance
d) Non-taxable allowance
* When 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.
Income, for this purpose, shall include all
taxable monetary payments like ..basic
salary,
• dearness allowance,
• bonus,
• commission,
• taxable allowances/perquisites
• but shall not include the value of any
non-monetary benefits/perquisites
Monetary salary includes:-
1.Basic Salary.
2.D.A. / A.D.A.
3.Bonus, Commission, Fees and all taxable
allowances or taxable portion of an allowance.
4.Any perquisites received in cash or in monetary
form.
5.Gratuity, Pension, Leave Salary but arrears of
salary and salary received in advance is to
be excluded.
6.In case employee is working simultaneously with
more than one employer, salary from all the
employers is to be included.
7.Monetary annual salary income Rs. 50,000 shall be
calculated after allowing deductions u/s 16(u) and
Ill 4.11 R is employed on part time basis with two
companies i.e. X company and Y company ltd. The
particulars of his income for the previous year 2020-
21 are as under:
Particulars X Y
Basic salary 62,000 33,000
Edcation allowance for 1 child 1,800
Reimbursement of electricity bill 2,000
Medical allowance 2,400
Employer’s contribution to recognised provident fund 1800 1500
Value of rent free accommodation taken by the employer on 3,000
rent
R is neither a director nor a substantial shareholder of either X Ltd. Or y ltd. Is he a specified
employer?
Compute his net monetary income

Ans.
Particulars
Basic salary 95,000
•Particulars
Education
•X allowance 1800 600
Less: 100*12 1200
•Y
Reimbursement of electricity bills 2,000
GROSS SALARY 1,00,000
Less: standard deduction 50,000
Net monetary benefit 50,000
4.20 perquisites which are taxable only in the case of specified
employees.
For e.g. if a watchman/sweeper is engaged by the employee and
his wages are reimbursed/paid by the employer, it is a
perquisites for all employees because it is the duty of the
employer to pay the salary of his watchman/sweeper.
If the watchman/sweeper is engaged by the employer and
facility of his services is provided to the employee, it will be a
perquisite only for specified employees.
Similarly, if a motor car is provided by the employer to the
employee for his personal use it shall be taxable perquisite in
case of a specified employee only. Whereas if the car belongs to
employee but expenses relating to personal use of such car are
paid or reimbursed by the employer, it shall be a taxable
perquisites in the hands of all employees, whether specified or
not.
Valuation of perquisites
Accommodation may be provided furnished or unfurnished
Accommodation may be provided rent free or at concessional
rate
(A) accommodation provided to Central and State Government
employees
(i) Rent free unfurnished
(a) If the accommodation is unfurnished:- License Fees
determined in accordance with rules framed by
Government for allotment of houses shall be deemed to be
the taxable value of perquisites.
(b) Where the accommodation is provided at concessional
rate:- we shall first assume as if it is provided rent free and
the valuation shall be the license fee. For valuation of
concession, such license fee shall be reduced by the rent
Rent free accommodation
1 government employee
2 non-government employee:-
a. ACCOMDATION owned by employer
b. Rent/hire/lease
(ii) Where the accommodation is furnished
Where the accommodation is furnished:- the value of
perquisite shall be determined as if it is unfurnished
accommodation which may be provided rent free or
at concessional rate (i.e. Value determined as per
clause (i)above).
Such value shall be : Add: 10% of original cost of
furniture and fixtures (if these are owned by the
employer) or actual higher charges paid or payable (if
these are taken on rent by the employer).
Note: The value so determined shall be reduced by
the amount of rent, if any, paid by the employee
(B) Where the accommodation is provided by any
other employer
Circumstance Population exceeding 25 population exceeding 10 Population not exceeding
s( lakhs as per 2001 census lakhs but not exceeding 10 lakhs.
25 lakhs as per 2001
census
a) where the (i) 15% of salary in (ii) 10% of salary in 7.5% of salary in other
accommodati cities in respect of the respect of the period areas, in respect of the
on is owned
by the period during which during which the said period during which
employer, or the said accommodation was the said
accommodation was occupied by the employee accommodation was
during the previous year.
occupied by the occupied by the
employee during the employee during the
previous year. previous year.
(b) where the Actual amount of Actual amount of lease Actual amount of lease
accommodati lease, rental paid or rental paid or payable rental paid or payable
on is taken
on lease or payable by the by the employer or by the employer or
rent by the employer or 15% of 15% of salary 15% of salary
employer salary whichever is whichever is lower as whichever is lower as
lower as reduced by reduced by the rent, if reduced by the rent, if
the rent, if any, actually any, actually paid by the any, actually paid by the
paid by the employee. employee. employee.
Where accommodation is furnished
(ii)
The value of perquisite as determined as per chart given
last slide, increased by 10% per annum of the cost of
furniture (including television sets, radio sets,
refrigerators, other household appliances, air-
conditioning plant or equipment) or if such furniture is
hired from a third party, the actual hire charges
payable for the same as reduced by any charges paid or
payable for the same by the employee during the
previous year.
© where the accommodation is provided by the
employer( government or other employer) in a hotel
not in syllabus
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 as reduced by the rent, if
any, actually paid or payable by the employee
No perquisite value even if accommodation provided in
a hotel.
where the employee is provided such accommodation
for a period not exceeding in aggregate fifteen days on
his transfer from one place to another.
Meaning of salary
Salary includes the pay, allowance, bonus or
commission payable monthly or otherwise or any
monetary payment, by whatever name called from
one or more employers, as the case may be, but does
not include the foll, namely---
(a) D.A or dearness pay unless it enters into the
computation of superannuation or retirement
benefits of the employee concerned.
(b) Employer’s contribution to the provident fund
(c) Allowances which are exempted from payment of

tax
Meaning of salary = basic salary + D.A. (forming
part/retirement benefit/same H.R.A. CONCEPT FOR
D.A.) + taxable portion of all allowances + bonus +
commission (% / Rs.) + leave encashment during
employment.
Exclude :- perquisites + provident fund + any payment
after retirement + arrears of salary / advance salary
4.21 a The above rule shall not apply in certain cases
not in syllabus
(a) Accommodation provided at certain site or in a
remote area:- the accommodation shall be tax
free perquisite if the accommodation is provided
to an employee working at mining site or an
offshore oil exploration site or a project execution
site, or a dam site or a power generation site or
an offshore site which-
(i) being of a temporary nature and having plinth area not exceeding
800 square feet, is located not less than eight kilometres away from the
local limits of any municipality or a cantonment board; or
(ii) which is located in a remote area:
Meaning of government
Central and state government employees
This category includes Central Government
employees and state government employees.
Besides, this category includes those Central
employees and state government employees who are
on deputation to a public sector undertaking but the
accommodation is provided by the central and state
government.
Employees of local authority or a foreign
government are not covered by this category (these
employees are treated as non-government
employees for this purpose.
(B) Accommodation provided at new place of posting
on transfer while retaining the accommodation at
the other place:- not in syllabus
The value of perquisite shall be determined with
reference to only one such accommodation which has
the lower value (as determined acc. To the above
provisions) for a period not exceeding 90 days and
thereafter the value of perquisite shall be charged
for both such accommodations.
Q 4.11: R furnishes the foll. Particulars of his remuneration for the previous year
2019-20:
(ii) D.A. (40% of which forms part of salary for retirement benefits) 2,000
p.m.
(iii) Lunch allowance 400 p.m.
(iv) Medical allowance 1000 p.m.
(v) City compensatory allowance 600 p.m.
(vi) Children education allowance (per child for 2 children)
360 p.m.
He is provided with a rent free accommodation in Delhi. The cost of the furniture
provided is Rs.2,00,000 and two A.C., which have been taken on hire by the co.,
have also been provided in the accommodation. The hire charges of each A.C. is
Rs.4000 per annum. Compute the value of rent-free accommodation if the
accommodation is provided by:
(vii) The govt. and value of the accommodation as per govt. rule is Rs.1,000 p.m.
(viii) RBI and the accommodation has been taken on rent by RBI at Rs.10,000
p.m.
(ix) XYZ LTD. And the accommodation has been taken on rent by the co. at
Sol. Accommodation provided by government to its
employee: the perquisite value shall be the value of
the accommodation as per government rules in this
case is 1,000 p.m.
Therefore the value of furnished accommodation
shall be:
Value of unfurnished accommodation 1,000 × 12 12,000
10% of the cost of furniture 200,000
20,000
Hire charges of two Ac 4,000 × 2 28000 40,000
8,000
Accommodation provided to government employee
as per government rule is 60,000.
Cost of furniture is 100,000
1 ac hire @ 3000 p.a.
t.v. Hire @ 100 p.m.
Calculate cost of furnished accommodation
60,000
10,000
3000
1200
74200
Accommodation provided by RBI or XYZ Ltd.
Perquisite value shall be 15% of the salary or rent paid
by RBI / the co. whichever is less.
Basic salary 24,000
DA (only that portion which is taken into for retirement benefits) 800
Lunch allowance 400
City compensatory allowance 600
Children education allowance (720 – 200) 520
27,320
The perquisite value of unfurnished accommodation

shall be 15% of 27,320 is 4,098p.m.or rent paid
10,000p.m. whichever is less.
360 * 12 *2 = 8640
Therefore, the perquisite value of the furnished
accommodation shall be as under:
Perquisite Value of unfurnished accommodation 4,098 × 12 = 3,27,840 49,176
Perquisite value of furniture (as calculated in the case of government 28,000
employees)
77,176
Since the rent-free accommodation has been given for

full year, we can calculate 15% of yearly salary also.
Yearly salary shall be 2,88,000 + 9,600 + 4,800 +
12,000 + 7,200 + 6,240 = 3,27,840
15% of salary shall be 49,176

Perquisite value of furniture (as calculated in the case of government employees) 28,000
77,176
Meaning of salary
Basic salary 24,000*12 2,88,000
Dearness allowance 2,000*12 = 24,000@40% 9,600
Lunch allowance 400*12 4800
Medical allowance 1000*12 1200
City compensatory allo 600*12 7200
Children edu. Allow 360*12*2 = 8640
Less children edu 100*12*2 = 2400 6240
Total 327840
9,600 + 4,800 + 12,000 + 7,200 + 6,240 = 3,27,840

ILL.4.13 A is working as a general manager of P co. Ltd.
Particulars of his salary for the financial year 2020-21 are as
under:
Particulars Rs.
Salary 20,000 p.m.
Bonus 38,400
Conveyance allowance (70% spent on official duties) 4,000 p.m
Medical allowance 1,000 p.m.
Employer’s contribution to recognised provident fund 20% of salary
He has been provided with a rent free accommodation in

GURGAON whose population exceeds 20 lakhs Compute the
value of the rent-free accommodation to be included in the
salary income of A for the assessment year 2022-21, if:
a. The accommodation is owned by the co;
b. The accommodation has been taken on rent by the co. At
14,000 p.m.
Sol.
Basic salary 2,40,000
Bonus 38,400
Taxable conveyance allowance (48,000 – 33,600) 14,400
Medical allowance 12,000 3,04,800
10% of salary 30,480
Re
(a) The value of unfurnished accommodation in this

case shall be 10% of salary i.e. 30,480.
(b) The value of unfurnished accommodation in this
case shall be 15% of salary, i.e. 45,720 or the rent
paid by the co. i.e. 1,68,000, whichever is less.
The perquisite value shall therefore, be 45,720.
Ill. 4.14 R submits foll. information regarding his salary income for the year
2018-19.
D.A./ FORMING part of salary 40% of basic salary
CCA 300 p.m.
Children education allowance 200 p.m. Per child for 2 child
Transport allowance 1800 p.m.
He is provided with a rent-free unfurnished accommodation which is

owned by the employer. The fair rental value of the house is 24,000 p.a.
Compute the gross salary assuming is provided in a city having population:
(a) Not exceeding 10 lakhs as per 2001 census.
(b) Exceeding 10 lakhs but not exceeding 25 lakhs as per 2001 census.
(c) Exceeding 25 lakhs.
(d) In the above illustration, assume the house was not owned by the
employer but was taken on rent @24,000 p.a. compute the value of
rent-free accommodation.
Sol.
Situation A Situation B Situation C
Basic salary 1,80,000 1,80,000 1,80,000
DA 72,000 72,000 72,000
CCA 3,600 3,600 3,600
Children education allowance 4,800 – 2,400 2,400 2,400 2,400
Transport allowance 21,600 21,600 21,600
Value of rent-free unfurnished accommodation 20,970 27,960 41,940
Gross salary 3,00,570 3,07,560 3,21,540
Salary meaning = 1,80,000 + 72,000 + 3,600 + 2,400 + 21,600 = 2,79,600
When the accommodation is provided in a city having population:
(a) Not exceeding 10 lakhs. 7.5% of salary 20,970
(b) Exceeding 10 lakhs but not exceeding 25 lakhs – 10% of salary 27,960
(c) Exceeding 25 lakhs – 15% of salary 41,940
Ill 4.14 In the above illustration, assume the house
was not owned by the employer but was taken on
rent @24,000 p.a. compute the value of rent-free
accommodation.
15% OF SALARY = ,79,600@15% = 41940
RENT PAID = 24,000
Ill 4.15 M submits the foll. Information regarding his
salary income which he gets from ABC Co. Ltd.
(ii) CCA 800 p.m.
(iii) Children education allowance 400 p.m. (for 3 children)
(iv) Reimbursement of medical exp. 25,000
He was entitled to HRA of 16,000 p.m. from 1.4.2020

to 31.8.2020. He was paying a rent of 17,000 p.m. for
a house in Delhi. W.e.f. 1.9.2020 he was provided with
an accommodation by the co. for which the co. was
paying the rent of 15,000 p.m. The co. charged him
3,000 p.m. as rent for the accommodation. Compute
the gross salary of M for assessment year 2021-22.
4.22 valuation of monetary obligation of the
employee discharged by the employer
It is taxable in the hands of all employees e.g. if the
employee engages a watchman and the salary of the
watchman is paid by the employer then it is a
perquisite taxable in the hands of employee.
The value of these perquisites is the actual
expenditure incurred by the employer in this regard.
Examples
(i) gas, electricity bill paid or reimbursed
(ii) Children education expenses paid or reimburses.
(iii) Medical expenses reimbursed;
4.23 valuation of life insurance premium/deferred annuity
premium paid/ payable by the employer
The actual expenditure incurred by the employer is the value
of the perquisite.
Amount become taxable as soon as it become due for
payment. Actual payment during the year is not necessary.
e.g. if as per the terms of employment, the life insurance
premium of ‘R’ is to be paid by his employer and the premium
become due on 28.3.21 but is paid on 4.4.21 it shall be a
perquisite for the previous year 2020-21 i.e. assessment year
2021-22.
Where the employer pays insurance premium under certain
schemes such as Employees’ State Insurance Scheme, Fidelity
Guarantee Scheme, it shall not be regarded as perquisite for
the employee because these schemes are generally for the
Deferred annuity premium
4.24 fringe benefits or amenities which shall be taxable
perquisite in the hands of all employees.
(i) Interest free or concessional loans
Value shall be determined as the sum equal to the interest,
commuted at the rate charged per annum by the SBI, as on
the 1st day of the relevant previous year in respect of loans for
the same purpose advanced by it.
Interest has to be calculated on the maximum outstanding
monthly balance as reduced by the interest, if any, actually
paid by him or any such member of his household.
If such loans are made available to an employee or any
member of his household, no value would be charged:-
(a) Loan amount not exceeding in the aggregate Rs.20,000.
(b) Loan is for medical treatment in respect of diseases
specified in rule 3 A.
1.“Maximum outstanding monthly balance” means the
aggregate outstanding balance for each loan as on the last day of
each month.
2. “member of household” shall include
(a) Spouse
(b) Children and their spouse
(c) Parents
(d) Servants and dependents.
Q 4.16 X Ltd. Has advanced an interest free loan of Rs.5,00,000 to
R for purchase of car on 1.5.2020. R has been regularly repaying
the loan in installments of Rs.20,000 p.m. at the end of each
month. Compute the value of perquisite on account of interest
assuming the interest charged by SBI is 10% p.a.
Q 4.20 take the above ill. And assume that the loan is being
regularly repaid on the 1st of next month instead of the end of the
Q 4.16 X Ltd. Has advanced an interest free loan of
Rs.5,00,000 to R for purchase of car on 1.5.2018. R
has been regularly repaying the loan in installments of
Rs.20,000 p.m. at the end of each month. Compute
the value of perquisite on account of interest
assuming the interest charged by SBI is 10% p.a.
Sol.
Month ending Outstanding loan
amount
May 2020 4,80,000
June 4,60,000
July 4,40,000
August 4,20,000
September 4,00,000
October 3,80,000
November 3,60,000
December 3,40,000
January 2021 3,20,000
February 3,00,000
March 2,80,000
41,80,000
41,80,000 ❎ 10/100 ❎ 1/12 = 34,833

Q 4.20 take the above ill. And assume that the loan is
being regularly repaid on the 1st of next month
instead of the end of the month.
Sol.
44,00,000 ❎ 10/100 ❎ 1/12 = 36,667
Ill. 4.22 what will be your answer if the above loan is
given for purchase of house and the rate of interest
charged by SBI is 9% p.a.
Sol. 41,80,000 ❎ 9/12 ❎ 1/12 = 31,350
Ill 4.23 what will be your answer if such loan is given
for major repairs of the house and not for purchase
of the house. Assume the rate of interest charged
by SBI to be 13% p.a. on such loan.
Sol. 41,80,000 ❎ 13 ❎ 1/12 = 45,283
Ill. 4.24 what shall be your answer if such loan is given
for the marriage of R’s daughter. Assume the rate of
interest charged by SBI to be 13% p.a. on such loan.
Sol. 41,80,000 ❎ 13 ❎ 1/12 = 45,283
Ill. 4.25 what will be your answer if such loan is given
for treatment of cancer, a disease specified in rule
3A.
Problem 3: R provides the foll. Particulars of his salary income.
Compute his gross salary:
Dearness allowance 50% of basic salary .
(60% of which is part of retirement benefits)
Bonus 2 months of basic salary
Transport allowance for commuting from residence to office and back
2,000 p.m.
He is provided furnished accommodation in Ghaziabad (population 18
lakhs) by the employer. Cost of furniture provided 2,40,000. The
employer recovers 2,000 p.m. from R on account of such house.
R took a loan of 6,00,000 from his employer on 1.4.20 for treatment of
specified disease. He spends the entire amount on his medical
treatment. He received 4,00,000 on 1.9.20 from the insurance co.
under health insurance scheme. He did not repay any amount to his
employer. State bank of India rate of interest for such loan is 12%
p.a.
SOL. Computation of Gross Salary
Particulars Amount Amount
Basic salary (₹30,000 × 12) 3,60,000
D.A. 50% 1,80,000

Bonus 30,000 × 2 60,000
Transport allowance (₹2,000 × 12) 24,000 24,000
Less : NIL NIL
Value of perquisite of interest (₹4,00,000 × 12/100 × 7/12) 28,000
Valuation of concession in the matter of rent (See working note) 55,200
GROSS SALARY 7,07,200 7,07,200
Meaning of salary of rent-free accommodation ₹3,60,000 + 1,08,000

and 60,000 + 24,000 = ₹5,52,000
Assume accommodation provided as rent free
10% of ₹5,52,000 = 55,200
Add: 10% of cost of furniture 240,000 = 24000
TOTAL = 79,200
(ii) The value of travelling, touring accommodation and any other
expenses paid for or borne or reimbursed by the employer for any
holiday availed of by the employee or any member of his household.
circumstances Value of benefit or amenity
(a) (i) where such facility is maintained by (i) It will be the value at which such facilities
the employer, and is not available are offered by other agencies to the public.
uniformly to all employees.
(ii) Where such facility is available uniformly (ii) Amount actually incurred by the employer.
to all employees.
(b) Where the employees is on official tour The amount of expenditure so incurred by the
and the expenses are incurred in respect of employer in respect of such member of
any member of his household accompanying household.
him.
© where any official tour is extended as a The value will be limited to the expenses
vacation. incurred by the employer in relation to such
extended period of stay or vacation of the
employee.
(d) In any other case, where such facility is A sum equal to the amount of expenditure
given to the employee or any member of his incurred by the employer.
household.
In the all above cases, the amount determined above
shall be reduced by the amount, if any paid or
recovered from the employee for such benefit or
amenity.
(iii) Value of free food and non-alcoholic beverages
Circumstances Value of benefit
(a) Tea or snacks provided during working hours. Nil
(b) Free food and non-alcoholic beverages during Nil
the working hours provided in a:
(i) Remote area; or
(ii) An offshore installation.
(c) Free food and non-alcoholic beverages
provided by the employer during working hours:
(i) At office or business premises , or Nil, if the value thereof in either case is up
(ii) Through paid vouchers which are not to Rs.50 Per meal.
transferable and usable only at eating joins. Amount in excess of Rs.50 per meal shall
be the value of such taxable perquisite.
(d) In any other case Actual amount of expenditure incurred by
the employer as reduced by the amount if
any paid or recovered from the employee
for such benefit or amenity.
Q 4.27: R is provided free meals in the office, during
office hours, for 300 days during the previous year.
The cost of meals to the employer is Rs.65 per meal.
(a) Determine the value of perquisite in respect of
meals.
(b) What shall be the value if the value per meal is
Rs.50.
Ill. 4.28 R, who is working in a remote area, is
provided free meal during office hours for 300 days
during the previous year. The cost to the employer
per meal is 60. determine the value of perquisite.
(iv) Value of any gift, voucher or token
The value of any gift, or voucher, or token in lieu of
which such gift may be received by the employee or
by member of his household on ceremonial occasions
or otherwise from the employer, shall be determined
as the sum equal to the amount of such gift.
The value of such gift, voucher or token, as the case
may, is below Rs.5,000 in the aggregate during the
previous year, the value of perquisite shall be taken
as nil.
Q. on silver jubilee of A & co. (sole proprietary
concern), R an employee, is given a gift of watch
whose value is Rs.4,500. is this gift taxable.
Q What shall be the taxable value of perquisite if the
value of watch is 6,500 instead of 4,500.
Q What shall be taxable value of perquisite if instead
of watch, R is given a cash gift 4,500.
(v) Expenses on credit cards
circumstances Value of benefit
(a) The perquisite value in respect of expenses incurred by the employee The amount paid
or any of his household members, which are charged to a credit card or reimbursed by
provided by the employer, or otherwise, are paid for or reimbursed by such employer.
such employer and such expenses are incurred for any purpose other than
mention under clause (b) below.
(b) if the expenses are incurred wholly and exclusively for official Nil
purposes and certain conditions mentioned in Rule 3(7)(v) are satisfied.
The amount determined in clause (a) shall be reduced by any amount paid or recovered from the
employee on such account.
Specified conditions to be fulfilled to claim that expenses have been incurred
wholly and exclusively for official purposes.
a. Complete details in respect of such expenditure is maintained by the employer
which may, include date of expenditure and nature of expenditure.
b. The employer gives a certificate for such expenditure to the effect that the
same was incurred wholly and exclusively for the performance of official
(vi) Club membership provided by the employer
(a) The payment or reimbursed by the employer of any expenditure The amount
incurred in a club by the employee or by any member of his paid or
household for any purpose other than mention in clause (b) below. reimbursed by
as reduced by any amount paid or recovered from the employee on such employer.
such account.
(b) if the expenditure is incurred wholly any exclusively for Nil

business purposes and certain conditions mentioned in Rule 3(7)(vi)
are satisfied
The amount determined in clause (a) shall be reduced by any amount

paid or recovered from the employee on such account.
Specified conditions to be fulfilled to claim that expenses have been incurred
wholly and exclusively for official purposes.
a. Complete details in respect of such expenditure is maintained by the
employer which may, include date of expenditure and nature of expenditure.
b. The employer gives a certificate for such expenditure to the effect that the
same was incurred wholly and exclusively for the performance of official
(vii) Use of moveable assets
(a) Use of laptops and computers Nil
(b) Moveable assets, other than---
(i) Laptops and computers; and (i) 10% per annum of the actual
(ii) Assets already specified in the cost of such asset, or
rules (ii) The amount of rent or charge
paid, or payable by the
employer.
The amount determined in clause (b) shall be reduced

by any amount paid or recovered from the employee
on such account.
(viii) Transfer of any moveable assets
Asset transferred Value of benefit
(a) Computers, Laptop and Actual cost of asset less depreciation at
Electronics items 50% (using reducing balance method) for
each completed year of usage by employer
less amount recovered from the employee.
(b) Motor Car Actual cost of asset less depreciation at
20% (using reducing balance method) for
each completed year of usage by employer
less amount recovered from the employee.
(c) Other movable assets: Actual cost of asset less depreciation at
10% (on SLM basis) for each completed
year of usage by employer less amount
recovered from the employee.
The amount determined in clauses (a), (b) and (c) shall be reduced by
any amount paid or recovered from the employee on such account.
Electronic gadgets in this case means data storage
and handling devices like computer, digital diaries
and printers.
They do not include household appliance (i.e. White
goods) like washing machines, microwave ovens,
mixers, hot plates, ovens etc.
4.24a Any Other Benefit or Amenity, Service, Right or
Privilege with Rule 3(7)(ix)
Taxable value of perquisite shall be computed based
on cost to the employer (under an arm's length
transaction) less amount recovered from the
employee.
However, expenses on telephones including a cell
phone incurred by the employer on behalf of
employee shall not be treated as taxable perquisite.
Q 4.30: R is employed with ABC Ltd. On a monthly salary Rs.25,000
p.m. The co. provides him with the foll. Benefits:
(i) A co. owned accommodation is provided to him in Delhi.
(ii) The co. has given him a housing loan of Rs.5 lakh on which it
charges interest @8% p.a. The entire loan is still o/s.
(assuming the interest@ 12% p.a.)
(iii) He is allowed to use the video camera belonging to the co.
The co. had purchased this camera for Rs.60,000 on 1.5.2017.
This camera was sold to him on 1.8.2020 for Rs.30,000.
(iv) The co. had purchased a car on 16.7.2017 for Rs.2,50,000. This
car is sold to R on 14.7.2020 for Rs.80,000. The car was not
being used by R.
(v) The co. pays telephone bills of Rs.24,000 for the telephone
installed at the residence of R.
Compute the gross income from salary of R for the assessment
year 2021-22.
The co. has given him a housing loan of Rs.5 lakh on
which it charges interest @8% p.a. The entire loan is
still o/s. (assuming the interest@ 12% p.a.)
5,00,000 *4%(12-8) = 20,000
He is allowed to use the video camera belonging to the
co. The co. had purchased this camera for Rs.60,000 on
1.5.2017. This camera was sold to him on 1.8.2020 for
Rs.30,000. p.y. 1/4/2020-31/3/21
60,000*10/100*4/12 = 2,000
1.5.17 to 30/4/18
1.5.18 to 30/4/19
1.5.19 to 30/4/20 date of sale 1.8.12020
Video camera 3 years 10% SLM
60,000 @ 10% = 6,000*3 = 18,000
60,000 – 18,000 = 42,000
Less selling price = 30,000 12,000
The co. had purchased a car on 16.7.2017 for Rs.2,50,000.
This car is sold to R on 14.7.2020 for Rs.80,000. The car was
not being used by R.
No of year completed
16.7.2017 to 15/7/2018
16/7/18 to 15/7/2019
16/7/2019 to 15/7/2020
Sale date 14/7/2020
Cost of asset 2,50,000
Less depreciation 2,50,000 @20% = 50,000
w.d.v 2,00,000
Less dep 2,00,000@20% = 40,000
Balance 1,60,000
Problem 4: R is employed with X Ltd. He submits the foll. Particulars of his
salary income:
i. Basic salary 30,000 p.m.
ii. Dearness allowance 15,000 p.m.
iii. A co. owned accommodation is provided at Varanasi (population 16 lakhs)
iv. Free use of computer for his son studying in a school. The computer was
purchased by the co. on 1.6.18 for 1,00,000 and it was sold to R for 15,000
on 5.11.20.
v. The co. has given him a loan of 6,00,000 on 1.6.20 for wedding of his
daughter. The entire loan is still outstanding (assume the interest rate
charged by SBI is 12% p.a.)
vi. Free food in office for 300 days. The value per meal is 70.
vii. Gift of watch on annual foundation of co. valued at 16,000.
viii. The co. had purchased a motor car on 5.4.16 for 10,00,000 and it was sold
to R for 2,10,000 on 2.4.20. Car is not being used by R.
ix. The co. had purchased video camera for 1,20,000 on 1.6.17 which R has
been using for his personal purposes since then. The camera was sold to R
for 50,000 on 1.11.20.
Basic salary (₹30,000 × 12) 3,60,000
Dearness allowance (₹15,000 × 12) 1,80,000
Valuation of rent free accommodation 10% of ₹3,60,000 36,000
Free use of computer Tax Free
Perquisite of sale of computer 10,000
Value of perquisite of interest (₹6,00,000 × 12/100 × 10/12) 60,000
Value of meal ₹300 × 70 21,000
Less: Tax free (300 × 50) 15,000 6,000
Value of gift watch 16,000
Less: Value of tax free gift 5,000 11,000
WDV OF CAR SOLD 5,12,000
LESS: 2,10,000 2,10,000 3,02,000
Value of use of video camera for 1.4.2020 to 31.10.2020 i.e.

7 months (1,20,000 × 10/100 × 7/12) 7,000
Benefit of sale of video camera
SLM (₹1,20,000 – 36,000) 84,000
Less: Sale price 50,000 34,000
Gross salary 10,06,000
Period of holding car 5.4.2016 to 2.4.2020 and the completed years shall be 3
years. Therefore WDV shall be determined as under:
Original cost 10,00,000
Depreciation for first completed year 2,00,000
8,00,000
Depreciation for second completed year 1,60,000
6,40,000
Depreciation for third completed year 1,28,000
5,12,000
Calculation of benefit on sale of computer
Original cost 1,00,000
Depreciation for first completed year 50,000
50,000
Depreciation for second completed year 25,000
25,000
Selling price 15,000 Value
The co. had purchased video camera for 1,20,000 on
1.6.17 which R has been using for his personal
purposes since then. The camera was sold to R for
50,000 on 1.11.20.
Previous year 1/4/2020 to 31/3/2021
Selling date 1/11/2020 = 7 months
Value of use of video camera for 1.4.2020 to
31.10.2020 i.e.
7 months (1,20,000 × 10/100 × 7/12) = 7,000
3years slm 1,20,000 @10% = 12,000 *3 = 36,000
120,000 – 36,000 = 84,000
Selling price less 50,000
4.25 Perquisites taxable in the hands of specified
employees.
s.no. Circumstances Engine Capacity up to 1600 cc Engine Capacity above
Or not exceed 1.6 litres 1600 cc or 1.6 litres
1. Where the motor car is owned or hired by the employer
(a) is used wholly and Fully Exempt.
exclusively in the Provided that specified documents are maintained by
performance of his the employer.
official duties;
(b) is used exclusively Actual amount of expenditure incurred by the
for the private or employer on the running and maintenance of motor
personal purposes of car during the relevant previous year including
the employee or any remuneration, if any, paid by the employer to the
member of his chauffeur as increased by the amount representing
household and the normal wear and tear ( which will be 10% p.a. of the
running and cost of the motor car) and as reduced by any amount
maintenance expenses charged from the employee for such use.
are met or reimbursed
by the employer;
1. (b) explanation
Actual cost of expenditure incurred by the employer
on the running and maintenance of motor car
Add:- driver’s salary (given)
add:- 10% wear and tear on original cost of asset
Less: any amount recover from employee
Benefit taxable
Car owned by employer and used by employee
Purpose Expenses met by Perquisite value
1. Official Employer Nil
2. Partly official Employer Small car – 1800 If driver 900
and partly p.m. p.m.
personal Big car. – 2400
p.m.
3. Partly official Employee Small car – 600 Driver 900 p.m.
and partly p.m.
personal Big – 900 p.m.
Amount recovered from employee is ignored
Personal Employer Expenses incurred by employer

including driver salary
+ 10% p.a. of cost of car
+ hire charges of car
- Amount recovered from
employer
(c) is used partly in the
performance of duties and
partly for private or personal
purposes of his own or any
member of his household and
-
(i) the expenses on Rs.1,800 p.m. Rs.2,400 p.m.
maintenance and running are (plus Rs.900 (plus Rs.900
met or reimbursed by the p.m., if p.m., if
employer; chauffeur is also chauffeur is also
provided to run provided to run
the motor car) the motor car)
(ii) the expenses on running Rs.600 p.m. Rs.900 p.m.
and maintenance for private or (plus Rs.900 (plus Rs.900
personal use are fully met by p.m., if p.m., if
the assesse chauffeur is also chauffeur is also
provided by the provided to
employer to run
the motor car)
2 Where the employee owns a motor car but the actual running and
maintenance charges (including remuneration of the chauffeur, if any) are met
or reimbursed to him by the employer
(i) such reimbursement is for the use Fully Exempted Provided that specified
of the vehicle wholly and exclusively documents are maintained by the
for official purposes; employer.
(iii) such reimbursement is for the the actual amount the actual amount
use of the vehicle partly for official of expenditure of expenditure
purposes and partly for personal or incurred by the incurred by the
private purposes of the employee or employer as employer as
any member of his household. reduced Rs.1800 reduced by Rs.2400
p.m. (plus Rs.900 p.m. (plus Rs.900
p.m., if chauffeur is p.m., if chauffeur is
also provided by the also provided to run
employer to run the the motor car)
motor car)
However, in this case, if actual However, in this case, if
expenses on running and actual expenses on running
maintenance for official purpose is and maintenance for official
more than Rs.18,00/2,700 p.m. as purpose is more than
the case may be, he can claim such Rs.24,00/3,300 p.m. as the
actual amount of expenditure as case may be, he can claim
deduction by maintaining the such actual amount of
documents specified below the expenditure as deduction by
table. maintaining the documents
If any amount is recovered from specified below the table.
employee the amount so
recovered from employee the
amount so recovered shall be
deducted from the above.
(ii) is used exclusively for the private Actual amount of expenditure

or personal purposes + driver’s salary
- Any sum paid by the
employee
Car owned by employee
Purpose Expenses met by Perquisite value
Official Employer Nil
Small Big
Partly Employer Expenses incurred Expenses incurred
by employer by employer
including driver including driver
salary salary
Less:- 1800 p.m. + Less:- 2400 p.m. +
900 p.m. (for driver) 900 p.m. (for driver)
Personal Employer Expenses incurred

by employer
including driver
salary
Less:- amount
recovered from
employee
3. automotive conveyance but the
actual running and maintenance
charges are met or reimbursed to him
by the employer
(i) such reimbursement is for the use Fully Exempt Provided Not applicable
of the vehicle wholly and exclusively that specified
for official purposes; documents are
maintained by the
employer.
(ii) such reimbursement is for the use Subject to maintaining Not applicable
of vehicle partly for official purposes specified documents by
and partly for personal or private employer, the actual
purposes of the employee. amount of expenditure
incurred by the
employer as reduced by
the amount of Rs.900.
p.m.
Vehicle provided by the employer for commuting from
residence to office and back
Such use shall not be treated as private or personal purpose.
Where more than one motor car is provided.
The value of perquisite shall be the amount calculated in
respect of one car in accordance with item (1)(c)(i) (the
expenses on maintenance and running are met or
reimbursed by the employer;) of the table as if the employee
had been provided one motor car for use partly in the
performance of his duties and partly for his private or
personal purposes and the amount calculated in respect of
the other car or cars in accordance with item (1)(b) (Personal
Purpose) of the table as if he had been provided with such car
or cars exclusively for his private or personal purposes.
Q. 4.25 compute the perquisite value of the car for the assessment
year 2021-22 in the foll. Situation if the taxable monetary
emoluments of X are Rs.1.5 lakh.
(i) The car is owned by X but the running and maintenance
expenses amounting to Rs.40,000 during the previous year are
met by the employer. The car is used
(a) For personal benefit of X (b) only for official duties
(c) 30% for personal benefit and 70% for official use.
(ii) The employer provides a car of 1.5 ltr. Engine capacity costing
Rs.5 lakh exclusively for the personal benefit of X. The expenses
incurred on the car are Rs.52,000.
(iii) The employer provides a car (below 1.6 ltr.) along with a driver
to X partly for personal purpose. The expenses incurred by the co.
are:
(b) Running and maintenance expenses Rs.32,000
(c) Driver’s salary Rs.36,000
(iv) In case (iii) the employer maintains a log book and
is established than 30% of the total mileage of the car
is for personal use of X and 70% for official duties.
(v) The employer provides a car (above 1.6 ltr.) to X
which is used for official work and is also used by X for
commuting from his residence to office and back.
(vi) X is provided with 2 cars to be used for official and
personal work and the foll. Information is available
from the co.’s records:
car 1 exceeding 1.6 ltr. Car 2 below
Cost of the car 6 lakh 4 lakh
Running and maintenance 60,800 48,000
Salary of driver 44,000 44,000
Sol. (i) car owned by the employee X
(a) full amount of expenditure met by the employer 40,000.
(b) No perquisite fully for official purpose.
© partly case:-
Actual amount of expenditure incurred by employee
Less: 1800 p.m. 1800 ❎ 12 = 21,600
40,000 – 21,600 = 18,400 will be perquisite
(ii) Employer provides car
Exclusively for personal benefit
Actual amount of expenditure + driver’s salary + 10% wear and tear – any
amount recover from employee
52,000 + 0 + 10% of 5,00,000 - 0
52,000 + 50,000 = 1,02,000 will be taxable
(iii) Employer provides car
Partly for official and partially for private purpose
Car 1800 ❎ 12 = 21,600
900 ❎ 12 = 10,800
(iv) Same (iii)
(v) Employer provides a car
No personal benefit. Commuting from office to
residence and vice versa.
(iv) Provided with 2 cars
Step 1 car 1 is used for personal and official use and
car 2 is exclusively for X.
Car 1 (2400 ❎ 12) + (900 ❎ 12) 39,600
Car 2 Running and maintenance expenses 48,000
10% of the cost for normal wear and tear 40,000
Salary of driver 44,000
1,32,000
Therefore total value of perquisite =
39,600 + 1,32,000 = 1,71,600
Step 2:- car 2 is used for personal and official use and
car 1 is exclusively for X.
Car 2 (1,800 ❎ 12) + (900 ❎ 12) 32,400
Car 1 Running and maintenance expenses 60,800
10% of the cost for normal wear and tear 60,000
Salary of driver 44,000
1,64,800
Therefore total value of perquisite =
32,400 + 1,64,800 = 1,97,200
Car 1 to be used partly for performance of duties and
partly for personal use. Thus the perquisite value of
the cars shall be 1,71,600.
4.26Provision for sweeper, gardener, watchman or
personal attendant:
The value of benefit resulting from provision of any of
these shall be the actual cost borne by the employer
in this respect as reduced by any amount paid by the
employee for such services. (Cost to the employer in
respect to the above will be salary paid/payable).
[Rule 3(3)]
e.g.
Paid by employer Sweeper 500 * 12 = 6000
200 p.m. paid by employee 200* 12 = 24,00
3,600
4.27 Perquisite arising out of supply of gas, electric
energy or water for household consumption
Value of perquisite
If the supply is from the value of the perquisite

employer’s own would be the
resources manufacturing cost per
unit incurred by the
employer.
In any other case. the amount paid by the
employer to the agency
supplying the same
4.28 Free/Concessional Educational Facility:
Value of perquisite if provided
Value of perquisite if provided
Facility extended to in the school owned by the
in any other school
employer
Children Cost of such education in Amount incurred less amount
similar school less Rs. 1,000 recovered from employee (an
per month per child exemption of Rs. 1,000 per
(irrespective of numbers of month per child is allowed)
children) less amount
recovered from employee
Other family member Cost of such education in Cost of such education
similar school less amount incurred
recovered from employee
Other Educational Facilities

Reimbursement of school fees of children or family
member of employees - Fully Taxable
Free educational facilities/ training of employees - Fully
4.29 Transport facilities provided by the employer
engaged in carriage of passenger or goods (except
Airlines or Railways)
Value at which services are offered by the employer
to the public less amount recovered from the
employee shall be a taxable perquisite.
ESOP/ Sweat Equity Shares not in syllabus
Fair Market value of shares or securities on the date of
exercise of option by the assesse less amount recovered from
the employee in respect of such shares shall be the taxable
value of perquisites. Fair Market Value shall be determined as
follows:
In case of listed Shares: Average of opening and closing price
as on date of exercise of option (Subject to certain conditions
and circumstances)
In case of unlisted shares/ security other than equity shares:
Value determined by a Merchant Banker as on date of exercise
of option or an earlier date, not being a date which is more
than 180 days earlier than the date of exercise of the option.
4.32 contribution made by employer in RPF and in an
approved superannuation fund.
Aggregate amount exceeding 7,50,000
(a) In an recognised provided fund
(b) In the scheme referred to in section 80CCD(1)
(c) In an approved superannuation fund
To the extent it exceeds 7,50,000 in a previous year
shall be treated as perquisite.
Contribution to an approved superannuation fund.
The contribution by an employer to an approved

superannuation fund up to Rs.1,50,000 per
employee in respect of 22 23 whom contribution is
made is exempt from Fringe Benefit Tax. The provision
takes effect from 1st April, 2007 and applies in
relation to the assessment year 2007-2008 (previous
year 2006-2007) and subsequent years.
Tax free perquisites (for all employees)
4.33 Treatment of medical facilities
The following cases, medical facility is not a perquisite and
thus not taxable in the hands of the employees.
(a) Medical facilities in a hospital, etc. maintained by the
employer.
(b) Medical treatment in India.
The following expenditure incurred by employer shall not
be a perquisites:
(c) 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 employee;
(ii) Expenditure actually incurred by employee on his family
member’s medical treatment in respect of any prescribed diseases
or ailments as prescribed in rule 3A of the income tax rules, in any
hospital approved by the principal chief commissioner of income
tax, having regard to the prescribed guidelines. However, in his
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 portion of insurance premium paid by the employer for
health insurance of the employee under schemes approved by the
Government or the Insurance Regulatory and Development
Authority.
© 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 IRDA is also tax-free perquisites.
(b) Medical treatment outside India
The foll. Expenditure incurred by employer on treatment of he
employee or his family members outside India is a tax-free
perquisites.
1. Expenses on medical treatment of the employee or any
member of his family outside India. However, such expenses
shall be tax free perquisites to the extent permitted by RBI.
2. 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 perquisites to the extent
permitted by RBI.
3. Travel expenses of the patient and one attendant who
accompanies the patient in connection with such treatment. It
shall be tax-free perquisite in the case of those employee
whose gross total income (before including therein the such
Family 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.
Ill 4.32 compute the taxable value of the perquisite in
respect of medical facilities availed of by X from his
employer in the foll. Situations:
(a) The employer reimburses the foll. Medical expenses:
i. Treatment of X by his family physician 4200
ii. Treatment of Mrs. X in a private nursing home 3600
iii. Treatment of X’s mother (dependent upon him)
1200 by a private doctor
iv. Treatment of X’s brother (not dependent upon him)
400
v. Treatment of X’s grandfather (dependent upon him)
1500
(b) The employer pays an insurance premium 3,000 under
a health insurance scheme on the health of X.
(C) The employer maintains a hospital for the employees,
where they and their family members are provided free
treatment. The expenses on treatment of X and his
family members during the previous year 2020-21 were
as under:
i. Treatment of X’s major son (dependent upon him) 2200
ii. Treatment of X 5200
iii. Treatment of X’s uncle 4600
iv. Treatment of Mrs. X 8000
v. Treatment of X’s widowed sister (dependent upon him)
4100
vi. Treatment of X’s handicapped nephew 2500
(d) Expenses on cancer treatment of married daughter of X
at Tata Memorial Hospital, Mumbai (an approved
hospital for this purpose) paid by the employer 50,000
and reimbursement of expenses for medical treatment
of himself amounting to 20,000
(e) The foll. Expenses on treatment of X’s major son outside
India were paid by the employer.
Actual expenses Expenses permitted by RBI
Treatment of X 75000 60,000
Treatment of Mrs. X 65000 45000
Travelling expenses of X’S
Travelling expenses x’s Son and X’s brother 120,000 ----
Assume that the other income of X is (a) 1,50,000 (b)
1,80,000
(A)
Treatment of X by his family physician 4,200
Treatment of Mrs. X in a private nursing home 3,600
Treatment of X’s mother (dependent upon him) 1200 by a private doctor 1,200
Treatment of X’s brother (not dependent upon him) 400
Treatment of X’s grandfather (dependent upon him) 1,500
Taxable perquisite 10,900
The entire 10,900 shall be taxable perquisite

(b) Tax free perquisite
©
Treatment of X’s uncle 4,600
Treatment of X’s HANDICAPPED Nephew 2,500
Taxable perquisite 7,100
Treatment of x, family members x’s major son, Mrs. x
are not taxable
(d) Tax free perquisite for treatment of specified diseases.
Reimbursement of 20,000 shall be taxable perquisite.
(e) Balance of 15,000 (75,000 – 60,000) and 20,000 (65,000 –
45,000) shall be taxable perquisite.
(a) Other income 1,50,000
1,50,000 + 15,000 + 20,000 = 1,85,000
(b) Other income 1,80,000
1,80,000 + 15,000 + 20,000 = 2,15,000
Hence the entire expenditure on travel amounting to 1,20,000
shall be taxable perquisite.
15,000 and 20,000 taxable amount of medical perquisite as
these are in excess of amount permitted by the RBI
Treatment of leave travel concession or assistance(LTC/LTA)
Exemption of Fare Only – LTA exemption can be claimed
where the employer provides LTA to employee for leave to
any place in India taken by the employee and their family.
Such exemption is limited to the extent of actual travel
costs incurred by the employee. The total cost of the holidays
is not covered, only the travelling cost is covered.
Travel within India only allowed- Travel has to be undertaken
within India and overseas destinations are not covered for
exemption.
Exemption on Actual Travel Expense – For example, where an
employer provides LTA of Rs.25,000, but an employee spends
only Rs.20,000 on the travel cost, then the exemption is
limited to only Rs.20,000. Travel cost means the cost of travel
and does not include any other expenses such as food, hotel
Meaning of Family for LTA :– The meaning of ‘family’
for the purposes of exemption includes spouse and
children and parents, brothers and sisters who are
wholly or mainly dependent on you.
Restriction on Number of Child for Claiming LTA :-
Further, exemption is not available for more than
two children of an individual born after October 01,
1998. This restriction does not apply in respect of
children born before this date, and also in cases
where an individual, after having one child, begets
multiple children (twins or triplets or quadruplets,
etc.) on the second occasion. The term “Child”
includes a step-child and an adopted child of the
Amount Exempted
1. Journey performed by Air – Economy Air fair of National carrier by
the shortest route or the amount spent which ever is less will be
exempt
2. Journey performed by Rail – A.C. first class rail fare by shortest
route. or amount spent which ever is less will be exempt.
3. Place of origin and destination place of journey connected by rail
but journey performed by other mode of transport – A.C. first class
rail fare by shortest route or amount spent which ever is less.
4. Place of origin & destination not connected by rail(partly/fully) but
connected by other recognised Public transport system – First class or
deluxe class fare by shortest route or amount spent which ever is less.
5. Place of origin & destination not connected by rail(partly/fully)
and not connected by other recognised Public transport system also –
AC first class rail fare by shortest route (as the journey had been
performed by rail) or the amount actually spent ,which ever is less.
Is exemption available every year?
No. The tax rules provide for an exemption only in
respect of two journeys performed in a block of four
calendar years. The current block runs from 2018-
21, next block year 2022-2025. If an individual does
not use their exemption during any block on any one
or on both occasions, he can claim the exemption of
first journey in the calendar year immediately
succeeding the end of the block of four calendar
years. In other words, maximum one journey can be
carried forward and that too only for the first
journey in the foll. Calendar year unless the period is
otherwise extended.
4.35 Profits in lieu of salary
1. any compensation from employer or former employer
on termination or modification of the terms of
employment.
2. any receipt from employer/former employer or from
provident/other fund (other than gratuity, commuted
pension, retrenchment compensation, house rent
allowance, provident fund or such other funds) to
extent not consisting of contributions by
assesse/interest on such contributions.
3. any sum received under a keyman insurance policy
including the sum allocated by way of bonus on such
policy.
4. any sum received before his joining any employment
Treatment of retirement benefits
4.36 Gratuity
Gratuity is payable to an employee when an employee leaves
employment after completing at least five years in service with
an employer – so this is payable –
1. On superannuation (means an employee who attains the age
of retirement is said to be in superannuation)
2. On retirement or resignation
3. On death or disablement due to accident or disease (the time
limit of 5 years shall not apply in the case of death or
disablement of the employee)
Gratuity is not paid as part of your regular monthly salary; it is
only payable on the occurrence of any of the above events.
For the purpose of exemption of gratuity under sec.
10(10), the employees are divided into 3 categories.
(a) Government employees and employees of local
authority
(b) Employees covered under the payment of gratuity
act, 1972
(c) Other employees.
Income Tax Exemption on Gratuity payment to an
employee as per Income Tax Act
(a) In case of Gratuity received by a Government
Employee
Any gratuity received by an employee of the Central
Government, State Government or local authority, on
(b) Gratuity Applicability as per Payment of Gratuity Act
1972
(b) In case of Gratuity received by an employee where
Employer is covered by the Payment of Gratuity Act
The least of the following is exempt from Tax
a) 15 days salary based on the salary last drawn for every
completed year of service or part thereof in excess of 6
months.
b) Rs 20,00,000 (increased to 20,00,000, w.e.f. 29.3.2018).
c) Gratuity actually received
For purpose of calculating completed year of service, more
than 6 months shall be taken as a completed year. A
period of 6 months or less than 6 months shall be ignored.
In the case of monthly rated employees for
calculating 15 days salary, the no. of days in a month
will be taken as 26 working days. Therefore, the
monthly salary divided by 26 and multiplied by 15.
For e.g., if the monthly salary of an employee at the
time of retirement is Rs.2,600; 15 days salary would
be Rs.1,500(2,600/26 × 15)
15 days salary based on the salary last drawn for
every completed year of service or part thereof in
excess of 6 months.
15/26 × meaning of salary × no. of completed years
15/26 × salary × no. of completed years
0ut of syllabus In case of seasonal workman, when
gratuity at the rate of 7 days wages for each season
requires to be worked out, then one has to see the
no. of seasons in each completed year of service of
the workman. (7 days wages × no. of seasons)
Out of syllabus In the case of piece rated employees,
for calculating 15 days salary, daily wages shall be
computed on the average of the total wages received
by him for a period of 3 months immediately
preceding termination of employment and the wages
paid for any over time work shall not be included.
Meaning of salary
Salary means all emoluments which are earned by
an employee while on duty or on leave in
accordance with the terms and conditions of his
employment and which are paid or payable to him in
cash and includes D.A. but does not include any
bonus, commission, H.R.A, overtime wages and any
other allowance.
Meaning of salary = Basic salary + D.A. (no

conditions apply)
Imp. Points
i. Where an employee had received gratuity in any
earlier years and had claimed exemptions in
respect of the gratuity received earlier also, he
will still entitled to this exemption but the limit
which at present is 20,00,000 shall be reduced by
the amount of exemption availed in the earlier
year. There will be no change in the two point.
ii. If gratuity is received from more than one
employer in the same previous year, by an
employee, the limit of 20,00,000 would apply to
the aggregate of gratuity received from one or
more employers.
(iii) Any gratuity paid to an employee, while he
continues to remain in service with the same
employer is taxable under the head salaries
because gratuity is exempt only on retirement or on
his becoming incapacitated or on termination of his
employment or death of the employee.
(iv) Gratuity is exempt, if the relationship of employer
and employee exists between the payer and the
payee.
Q. 4.27 R retires on 4.1.2020 after serving XY co. Ltd.
For a period of 16 years and 11 months. At the time of
retirement his basic salary was Rs.44,000 p.m. and he
was also entitled to D.A. of Rs.8,000 p.m. On his
retirement, he received Rs.6 lakh as gratuity. Compute
the amount of gratuity exempt from tax and the
amount to be included in gross salary. He is covered
under the payment of gratuity act.
a) Gratuity received 6,00,000
b) 15 ❎ 52,000/26 ❎ 17 = 5,10,000
c) 20,00,000
Receiving amount – exempted amount of gratuity
6,00,000 - 5,10,000 = 90,000
Ill 4.33 R joined the service on 1.6.2002. He retired
from his service on 17.11.20 and received 21,20,000
as gratuity.
At the time of retirement his basic salary was 1,40,000
p.m. and D.A. 70,000 p.m.(60% of which was part of
salary).
Compute the amount of gratuity exempt from tax and
the amount to be included in gross salary. He is
covered under the payment of Gratuity Act.
Sol. No. of completed years = 18 years 5 months + 17
days
= 18 years
a) Gratuity received 21,20,000
b) 15 ❎ 2,10,000/26 ❎ 18 = 21,80,769
c) 20,00,000
Receiving amount – exempted amount of gratuity
21,20,00,000 – 20,00,000 = 1,20,000
(c) Treatment in the case of other employees
The least of the following is exempt from Tax
a) Half month’s average salary for each completed year of
service. While calculating completed years, any fraction of a
months or days shall be ignored.
For example – if you have worked in an organization for 14 years
and 9 months, the number of years in employment shall be 14
years.
Here salary is taken as average salary of the 10 months
immediately before the month in which the person retires.
Minimum exempt
(a) ½ month’s average salary ❎ no. of completed years
(b) Rs20,00,000
(c) Actual amount of Gratuity received
Meaning of salary:- Salary includes D.A. if the terms
of employment so provide, but excludes all other
allowance or perquisites. All other allowances and
perquisites will not be included. Commission , if
received as a fixed % of turnover achieved by the
employee, would form par of salary.
Meaning of salary Same as H.R.A.
Average salary e.g. If an employee retires on
2.1. 2021. the average salary shall be taken as the
aggregate of salary for the period from 1.3.20 to
31.12.2020 divided by 10.
Date of retirement 2.1.2020, salary at the time of retirement is
25,000 p.m., he got annual increment on august, for Rs. 5,000.
Average of 10 months
31 December 2020
30 novemebr 2020
Octomber
September
August
July 20,000 p.m. ❎ 10 = 2,00,000/10 = 20,000
June
May 20,000 ❎ 5 + 25,000 ❎ 5 = 100,000 + 1,25,000
April 10 10
= 2,25,000/10 = 22500
march
Ill. 4.29 R, who has employed with P co. Ltd. Retired
on 21.10.2020, received Rs.3,60,000 as gratuity. He
served the co. For 26 years and 8 months. At the
time of retirement, his salary was Rs.15,000 p.m.
However, the average salary for 10 months
preceding the month of retirement is Rs.14,400
p.m. He is not covered under the payment of
Gratuity Act, 1972. Compute the taxable gratuity.
(b) What amount of gratuity shall be taxable, if R,
earlier to his appointment with P co. Ltd., had
worked for 4 years with X ltd. And was not entitled
to gratuity from X Ltd.?
Sol. (a) Minimum of the foll.
a. Actual amount received 3,60,000
b. 20,00,000
c. Half month’s average salary ❎ no. of completed years
(1/2 ❎ average salary ❎ no. of completed years)
14,400/2 ❎ 26 = 1,87,200
3,60,000 – 1,87,200 = 1,72,800 gross salary
(b)
d. Actual amount received 3,60,000
e. 20,00,000
f. Half month’s average salary (1/2 ❎ average salary)
14,400/2 ❎ 30 = 2,16,000
3,60,000 – 2,16,000 = 1,44,000
Ill. 4.36 X, a general manager of R co. Ltd. Retired from the
co. On 15.6.20. At the time of such retirement, his basic
salary was Rs.70,000 p.m. He was also entitled to
dearness allowance @20% of his basic salary. 60% of the
dearness allowance forms part of the salary for
retirement benefits. He had worked with the co for 10
years 11 months and 15 days. He got an increment of
Rs.5,000 in his basic salary w.e.f. 1.2.20. At the time of his
retirement, the co. Paid him a gratuity of Rs.10,00,000. X
had earlier worked with S co. Ltd. From where he had
received gratuity and had availed of an exemption
3,00,000. compute the amount of exemption available
out of the gratuity received from R co. Ltd. He is not
covered under the payment of Gratuity Act. Also compute
his gross salary for the assessment year 2021-22.
On 15.6.20. At the time of such retirement, his basic
salary was Rs.70,000 p.m.
He got an increment of Rs.5,000 in his basic salary w.e.f.
1.2.20.
He was also entitled to dearness allowance @20% of his
basic salary. 60% of the dearness allowance forms part
of the salary for retirement benefits.
70,000 ❎ 4 + 65,000 * 6 = 6,70,000+80400/10= 750400
10
may, April, march , feb 70,000 jan , dec, nov, oct, sep,
aug
1. ½ * 75040 * 10 = 3,75,200
2. 1700,000
Ill 4.37 A retired from his job w.e.f 1.9.19. He had
joined the service on 1.1.03. He gets an increment
in his basic salary amounting to 2,500 every year on
January 1. At the time of his retirement, he was
getting a basic salary of 50,000 p.m. He was also
entitled to D.A. @10% Of basic salary and a
commission on turnover @ 1% of the total sales
achieved by him. His turnover for the 12 months
ending on 31.8.19 was 30,00,000, spread evenly
over the year. He received a sum of 8,00,000 as
gratuity on the date of his retirement. Compute his
gross salary for the assessment year 2020-21.
Problem 5 After SERVING 34 YEARS In an Indian
Company. Mr. X retires from service on 1.1.21. The
co. Pays him a gratuity of 6,00,000. his monthly
salary during the calendar years 2017, 2018 ,
2019and 2020 has been 18,000; 20,000; 22000 and
24,000 respectively. His annual increment became
due on 1st January, every year.
You are required to determine the amount of gratuity
exempt under section 10(10) of the income tax act.
Sol. Gratuity shall be exempt to the extent of the
minimum of following 3 amounts
(i) 1/2 months average salary for every completed
year of service
i.e. 34 × 1/2 × ₹24,000 = ₹4,08,000
(ii) ₹20,00,000
(iii) Actual amount received i.e., ₹6,00,000
Therefore ₹4,08,000 shall be exempt under section
10(10). Gross salary include 1,92,000
Note.—Average salary for the last 10 months shall be
₹24,000.
Problem 6 Shri Narendra Mohan an employee
completed 27 years and 8 months of service with
Messrs Jaipur Iron and Steel Ltd. and at the time of
retirement on 1.1.2021, he received ₹3,30,000 as
gratuity. His monthly salary on the date of retirement
was ₹19,500. He was drawing ₹19,000 p.m. prior to
July 2020. Find out the amount of taxable gratuity if
Payment of Gratuity Act, 1972 applies.
(i) 19500 /26 × 15 × 28 = 3,15,000
(ii) ₹20,00,000
(iii) ₹3,30,000
∴ ₹3,15,000 is exempt and balance ₹15,000 is taxable.
Note.—If an employ is covered under Payment of
Gratuity Act, 1972, salary last drawn is taken and not
the salary of preceding 10 months.
Problem 7 Shri Rajesh was employed since 1.1.1988 in
a commercial establishment. His salary was fixed at
₹14,800 in the grade of ₹14,000 – 400 – 22,000 with
effect from 1.7.2018. He got 15% of his salary as
dearness allowance which is treated as salary for
computation of retirement benefits. He retired from
service on 1.2.2021. He received ₹3,40,000 as gratuity
from his employer. Calculate his gross income under
the head 'Salaries' for the assessment year 2021-22 if
— (i) Payment of Gratuity Act, 1972 applies,
(ii) Payment of Gratuity Act, 1972 does not apply.
His salary was fixed at ₹14,800 in the grade of ₹14,000 – 400 – 22,000 with effect from
1.7.2018.
1.7.2018. to 30/6/19 14,800
1.7.19 to 30.6.220 15,200
1.7.20 to 1.2.2021 15,600
1.2.2021. retirement
1.1.1988 date of joining
1.1.88 to 31/12/89
89 to 90
90 to 91
91 to 92
92 to 93
93 to 94
94 to 95
95 to 96
96 to 97
97 to 98
98 to 99
99 to 2000
Sol.
s.no Particulars amount

(i) Salary from April, 2019 to January, 2020
April 2019 to June, 2019 ₹15,600 × 3 46800

July 2019 to January, 2020 16000 × 7 112000
D.A. @ 15% 46,800

Salary
(a) Gratuity Act Applies
(i) 18400 × 15 × 33 = 3,50,307
(b) 26
(ii) ₹20,00,000
(iii) ₹3,40,000
Hence Taxable Amt. = ₹3,40,000 – 340,000= 0
Gross Salary = ₹1,78,020 + 0
(b) Gratuity Act does not apply 2,62,020
(i)1/2 × 15880* ×33
(ii) Maximum amount 2,0,00,00
(iii) Actual amount received 3,40,000
∴ Taxable Amt. = ₹3,40,000 – 2,62,020 77980 77980
Gross Salary ₹ 15,600 * 3 + 16,000*7 = ₹ 2,83,580
* Average salary on the basis of preceding 10 months
1,78,020/10 = ₹17,802
Salary of last 10 months ₹ 112000+ 46800 = 158800/10=
15,880
date of retirement 1.2.2021
1.7.2017 date of salary fixed 14,800

1.7.2017 to 30.6.2018 14,800
1.7.2018 to 30.6.2019 15,200
1.7.2019 to 30.6.2020 15,600
1.7.2020 to 1.2.2021 16,000
Current previous year 1.4.2019 to 31.3.20
15600 for 3 (April, may, June)
Problem 8 Shri Vinod, who was in part-time employment with A Ltd. and B Ltd. furnishes the following information:
Particulars A Ltd. B Ltd.

Basic salary per month (last drawn) 10,000 6,000
Dearness Allowance 30% 30%
(Forming part of salary (40% Forming part of
for salary for
retirement benefits) retirement benefits)
Date of Retirement 1.12.2020 15.11.2020

Period oftheservices
Compute 22 years 11 months
gross salary of shri Vinod for assessment 2021-22 20 years 4 months
Amount of gratuity received 1,43,000 1,20,000
Date of last increment in basic Salary 1.4.2020 1.8.2020
Amount of last increment 1,000 500
Sol.
Particulars A ltd. B ltd.
Salary (A Ltd. 10,000 × 8) 80,000
(B Ltd. 6,000 × 31/2 + 5,500 × 4) 43,000
D.A. 30% OF SALARY 24,000 12,900
Gratuity received
From A Ltd. 1,43,000
Less: Exempt (See working note) 1,40,140 2,860
From B Ltd. 1,20,000
Less: Exempt (See working note) 63,280 56,720
1,06,860 1,12,620
Therefore Total Gross Salary = ₹2,19,480

Note.—Gratuity shall be exempt to the extent of
minimum of the following:
S.NO PARTICULARS AMOUNT AMOUNT
(I) Actual amount received 1,43,000 1,20,000
(II) Half month average salary for every completed year of service
A 12740/2 × 22 1,40,140
B 6328 /2 × 20 63,280,
(III) Specified limit 20,00,000 20,00,000
Computation of Average Salary

A B
Basic Salary of last 10 months Basic Salary of last 10 months
8 × 10,000 + 2 × 9,000 98,000 3 × 6,000 + 7 × 5,500 56,500
D.A @ 30% 29,400 DA[ 56,500 × 30 /100 × 6,780
40 /100]
1,27,400 63,280
∴ Average Salary 12,740 ∴ Average Salary 6,328
4.37 Treatment of pension
Pension is a retirement benefit; this is taxed as salary in the
hands of the employee.
Family pension received by the dependence of the employee is
taxable under the head income from other source.
Two kinds of pension:-
Uncommuted pension:- periodical payment on monthly basis
Commuted pension:- lump sum amount
Exempt :- government employees or employees of local
authorities or statutory corporation. High court judges.
when a person forgo a portion of the pension and receive a lump
sum amount by surrendering such portion of pension, this is
called commuted pension. The pension may be fully or partly
commuted.
Tax Treatment of Pension:-
Uncommuted It is fully taxable in the hands of all employees, whether government or
pension i.e. non- government
periodical pension
Commuted (a) Exempted in case of Government employee or employee of
pension local authorities or statutory corporation[section 10(10a)(i)]
b) Non-Government Employee
Any commuted pension received is exempt from tax in the
following manner:
If the employee is in receipt of gratuity
Exemption = 1/3rd of the amount of pension which he
would have received had he commuted the whole of
the pension.
If the employee does not receive an gratuity
Exemption = ½ of the amount of pension which he
would have received had he commuted the whole of
the pension
Caution: Exemption shall be to the extent it is allowed to be
commuted and the balance uncommuted Pension received
periodically will be fully taxable
Q. 4.36 An employee, drawing a salary of Rs.15000 p.m., retires from service and
becomes entitled to receive pension of Rs9000 p.m. He gets half his pension commuted
and receives Rs.180000 as lump sum payment. Henceforth, he shall be entitled to a
pension of Rs.4500 p.m. Compute the exemption available under section 10(10A) in
respect of the commuted pension. He is also entitled to gratuity.
Sol. employee was entitled to a pension of Rs9,000 p.m. out of which he commuted 50%
i.e. Rs.4,500 p.m. and received a sum of R 180,000. The exemption, however, will be to
the extent of commuted value of 1/3 of the total pension which he was entitled to
receive i.e. 1/3 of Rs.9000. If commuted value of Rs4,500 is Rs.1,80,000, full commuted
value would be Rs.3,60,000 and 1/3 of the same i.e. Rs.1,20,000 shall be exempt. The
balance Rs.60,000 shall be included in gross salary. Alternatively, the exemption can be
calculated as under: OR
4,500 pension commuted – amount received 1,80,000
For 3,000 pension commuted- commuted amount shall be
180,000 ×3000 = 1,20,000
4500
Rs1,20,000 would be exempt and Rs.60,000 would be taxable. Besides, the uncommuted
pension of Rs1,500 per month will also be taxable.
180000 = 1/2; = 180000*2 = 3,60,000

3,60,000 *1/3 = 1,20,000 exempt
OR
Sol. 50% of commuted pension is 1,80,000
Hence 1/3 of the pension would amount to =
1,80,000 / 2 ✕ 3
1,20,000 exempt amount
1,80,000 – 1,20,000 = 60,000 taxable amount
Q. 4.37 A retired on 15.4.2020 from B co. LTD. He was entitled
to a pension of Rs.4,000 p.m. At the time of retirement he got
75% of the pension commuted and received Rs.2,40,000 as
commuted pension. Compute the taxable portion of the
commuted pension if----
(i) He is also entitled to gratuity
(ii) He is not entitled to gratuity
Sol. (i) 75% of commuted pension is 2,40,000
Hence commuted value (75%) of 1/3 of the pension would
amount to = 2,40,000
Commuted value 75/100 ✕ 1/3 = 2,40,000
Commuted value = 2,40,000 ✕ 100/ 75 ✕ 3
2,40,000 – 1,06,667 = 1,33,333 taxable amount
(ii) 75% of commuted pension is 2,40,000
Hence commuted value of 1/2 of the pension would
amount to = 2,40,000 ✕ 100/ 75 ✕ 2
2,40,000 – 1,60,000 = 80,000 taxable amount
Problem 9 A joined a service in the grade of ₹10,400 –
400 – 16,000 – 500 – 20,000 on 1.7.2004 and resigned
from the service on 15.9.2020. He was also entitled to
dearness allowance @ 50%, which forms part of
salary for retirement benefits. On retirement, he
received a gratuity of ₹2,40,000. He was entitled to a
pension of ₹8,000 per month w.e.f. 16.9.2020. He got
75% of his pension commuted w.e.f. 1.1.2021 and
received a sum of ₹6,00,000 as commuted pension.
Compute his Gross Salary for assessment year 2021-
22.
A joined a service in the grade of ₹10,400 – 400 –
16,000 – 500 – 20,000 on 1.7.2004 and resigned from
the service on 15.9.2020.
1.7.2004 to 30.6.2005 10,400
1/7/2005 to 30/6/2006 10,800
1.7.05 to
1/7/2016 to 30/6/2017 15,200
1/7/2017 to 30/6/2018 15,600
1/7/2018 to 30/6/2019 16,000
1/7/2019 to 30/6/2020 16,500
1/7/2020 to 15/9/2020 17,000
November 2020 to august 2021 = 17,000 *2 + 16,500
Sol.
Particulars Amount Amount
Salary (₹16,500 × 3 + 17,000 × 2.5) 92,000
D.A. 50% 46,000
Gratuity received 2,40,000
Exempt:- minimum of the following
(i) Amount specified 20,00,000
(ii) Half month average salary for every year of service 1,99,200
[24900 /2 × 16]
(iii) Actual amount 2,40,000 1,99,200 40,800
Pension (₹4,000 + 8,000 ✕ 3 + 2,000 ✕ 3) 34,000
Commuted pension received 6,00,000
Less: EXEMPT [₹6,00,000 × 4/3 × 1/3 ] 2,66,667 3,33,333
Gross Salary 5,46,133
Note.—Average Salary = 16,500 × 8 + 17,000 × 2 =

1,66,000 + 50% of 1,66,000 = 2,49,000/10 = 24,900.
Points to remember.
Judges of the Supreme Court or High Court will be
entitled to exemption of the commuted portion not
exceeding ½ of the pension.
Any commuted pension received by an individual out
of annuity plan of the life insurance corporation of
India (LIC) from a fund setup by that corporation will
be exempt-
4.38 Treatment of leave salary
Many organisation provide the facility of encashment of
leave (by whatever name called be it earned leave, sick leave
etc.) either
1) during the period of employment or
2) at the time of retirement (including separation on account
of resignation, retrenchment, VRS etc. other than
termination) of the employee or
3) at the time of Termination of the employee
For tax treatment of leave encashment u/s 10(10AA) of
Income Tax Act 1961 the employees has been classified into
two types:
1) Govt. Employees and
2) Non-Govt. employees (PSU employees are considered as
S.N Leave encashment timing Govt Employees Non-Govt Employees
1 During period of service Fully taxable Fully taxable
2 At the time of retirement Fully exempt Exemption is least of the
or leaving job by a following:
employee(other than on 1) Rs3,00,000
account of Termination) 2) Leave encashment
amount actually received
3) ‘10 months’ average
salary {10 ✕(average
salary)}
4) Cash equivalent to
leave to the credit of
employee at time of
retirement **
Cash equivalent of un availed leave calculated on the
basis of maximum 30 days leave for every year of
actual service rendered to the employer from
whose service he has retired. The cash equivalent is
to be calculated on the basis of the average salary.
salary means Basic + Dearness Allowance (forms part
of pay) + Commission (Fixed % on turnover).
Same HRA SALARY
Average salary means
average salary of the 10 months immediately before
the month in which the person retires.
e.g. If an employee retires on 2.1. 2021. the average
salary shall be taken as the aggregate of salary for
the period from 1.3.21 to 31.12.2021 divided by 10.
The following additional points should be noted:
i. Where leave salary is received from two or more
employers in the same year, then the aggregate
amount of leave salary exempt from tax cannot
exceed Rs3,00,000
ii. Where leave salary is received in any earlier year
from a former employer and again received from
another employer in a later year, the limit of
Rs3,00,000 will be reduced by the amount of leave
salary exempt earlier.
iii. Leave salary (or leave encashment) received by
the legal heir of the deceased employee is not at all
taxable in the hands of his legal heirs
Example: Mr. Gupta retired on 1.12.2020 after 20 years 10 months of
service, receiving leave salary of Rs5,00,000.
Other details of his salary income are:
Basic Salary : Rs5,000 p.m.(Rs1,000 was increased w.e.f. 1.4.2020)
Dearness Allowance : Rs3,000 p.m. (60% of which is for retirement
benefits)
Commission : Rs500 p.m.
Bonus : Rs.1,000 p.m.
Leave availed during service : 480 days
He was entitled to 30 days leave every year.
What will be the taxable leave salary assuming:
(a) He is a government employee.
(b) He is a non government employee.
Sol. (a) He is a government employee. Fully exempt.
Leave Salary received at the time of retirement Rs5,00,000
Less : Exemption under section 10(10AA) Rs5,00,000
(b) He is a non-government employee
Leave Salary received at the time of retirement Rs.5,00,000
Less : Exempt under section 10(10AA) [See Note below] Rs26,400
Taxable Leave Salary Rs4,73,600
Exemption is least of the following:
1) Statutory Limit Rs3,00,000
2) Leave encashment amount actually received Rs5,00,000
3) 10 months’ salary
{(5000*8)+(4000*2)+(60% of 3,000 *10)*10}/10 Rs66,000
4) Cash equivalent to leave to the credit of employee at time of
retirement
((20*30)- 480)*(6600/30) [ 4 * 6600} =
26400
Rs26,400
Leave availed during service : 480 days
He was entitled to 30 days leave every year.
Total Leave 30 *20 = 600 days
Income tax authority 30*20 = 600 days
Less Availed leave = 480
Unavail lead = 120 days = 4
30
Problem 10 R an employee of XYZ Ltd. retired from
service w.e.f. 1.1.2021 after serving for 16 years and 7
months. At the time of retirement he received a sum
of ₹50,000 as leave encashment for un availed leave
of 300 days. He was entitled to 40 days leave for each
year of completed service. He was getting a salary of
₹5,000 per month at the time of the retirement. He
received increment of ₹500 w.e.f. 1.7.2020.
Compute the amount of leave encashment exempt
from tax.
Sol.
S.no Particulars Amount Amount
(i) Actual amount received 50,000
(ii) 10 months average salary 48,000
(6 × 5000 + 4 × 4500) × 10
10
(iii) Cash for un availed leave calculated on basis of 30
days leave
Actual leave (40 × 16) 640 days
Un availed leave 300 days
Therefore, leave availed 340 days
Leave on basis of 30 days (30 × 16) (income tax 480 days
authorty) 140 days
Therefore, un availed leave on basis of 30 days
(480 – 340) 22,400
Cash equivalent for 140 days [140 × 4800 ]
30
(iv) Amount specified 3,00,000
Hence ₹22,400 shall be exempt.
Problem 11
Shri A.K. Gupta was employed in a factory in Faridabad. He
retired on 1.1.2021 after completing a service of 26 years
and 5 months. He had been getting a salary of ₹23,000 per
month and a dearness allowance of ₹2,000 per month
(forming part of retirement benefits) for the last four years.
His pension was determined @ ₹9,000 p.m. and 3/4 portion
of it was commuted for ₹2,70,000. In addition to this he
received a gratuity of ₹4,00,000 and as per entitlement of
30 days earned leave for each year of service, he also
received ₹3,00,000 for encashment of earned leave of 12
months during the previous year. Compute gross income
from salaries of Shri Gupta for the assessment year 2021-22,
assuming he is not covered under Payment of Gratuity Act.
(1) Salary 23,000 × 9 2,07,000
Sol.
(2) DA 1,8000
(3) Uncommuted Pension 9,000 × 1/4 × 3 6,750
(4) Commuted Pension Received 2,70,000
Less: Exempt [2,70,000 × 4/3 × 1/3 ] 1,20,000 1,50,000
(5) Gratuity Received 4,00,000
Less: Exempt
(i) 4,00,000
(ii) [25000 × 26]/2 = 3,25,000
(iii) 20,00,000 = 20,00,000 3,25,000 75,000
(6) Leave Encashment Received 3,00,000
Less: Exempt
(i) Actual 3,00,000
(ii) 12 months × AMS
12 × 25,000 = 3,00,000
(iii) 10 months × AMS=2,50,000 3,45,333
(iv) 3,00,000 2,50,000 50,000
Income tax 12 months 30 * 26 = 780 days
Company according = 365 days
Less 415/30 = 13.83
25,000*13.83 = 3,45,833
4.39 Retrenchment compensation
Minimum of the foll exempt
i. Actual amount received
ii. 15 days average pay for every completed year of
service or part thereof in excess of 6 months;
iii. Amount specified by the Central Government, i.e.
5,00,000
4.40 Voluntary retirement
Minimum of the foll exempt
Exemption actual amount of compensation
5,00,000
Treatment of provident fund
Particulars SPF RPF URPF PPF
1. Deductions Deductions No Deductions
Employee’s u/s 80 C is u/s 80 C is deduction u/s 80 C is
/ assesses’ available available from u/s 80 C is available
contributio from gross gross total available from gross
n total income income total income
subject to subject to the subject to
the limit limit specified the limit
specified therein specified
therein. therein
2. Fully exempt Exempt up to Not exempt Not
Employer’s from tax 12% of salary. but not applicable as
contributio Amount in taxable there is only
n excess of 12% every year. assesses
is included in own
gross salary. contribution
Particulars SPF RPF URPF PPF
3. Interest Fully Exempt u/s 10 Not exempt but not taxable Fully
on exempt up to 9.5% every year. exempt
provident from tax p.a.. Interest
fund credited in
excess of 9.5%
p.a. Is included
in gross salary.
4. Fully Exempt subject Accumulated employee's Fully

Repayment exempt to certain contribution is not taxable . exempt
of lump sum condition Accumulated employer’s
amount on contribution + interest on
retirement/ employer’s contribution (till
resignation date) is taxable as profit in
/ lieu of salary. Interest on
termination employees contribution (till
date) is taxable as income
from other sources
Meaning of salary for Provident Fund
Same H.R.A meaning.
employer
Given 2,880 p.m. * 12 = 34,560
Meaning of salary
Basic salary + d.a. forming part of salary / retirement
benefit + commission (fixed/turnover based)
23,400 * 12 + 4,000 * 12 = 3,28,800 @12% = 39,456
Exempt 34,560
He and his employer each contributed 12.5% of his salary to
recognised provident fund. The interest credited to this fund for
the previous year at 13.5% rate of interest amounted to 27,000.
monthly salary of 20,000. Dearness allowance @2,000 p.m. Which
is granted to him under the terms of employment and counted for
retirement benefits. . Commission on sales of 10,00,000 @5%.
SOL. Meaning of salary= 20,000*12 + 2,000*12 + 50,000
= 2,40,000 + 24,000 + 50,000 = 3,14,000
RPF (12.5%) = 3,14,000 @ 12% = 37,680 EXEMPT
12.5% 0F 314,000= 39,250
DIFFERENCE 39,250 – 37,680 = 1,570 INCLUDE IN GROSS SALARY
= 27,000 (13.5 – 9.5) = 27,000 (4) = 8,000 GROSS SALARY
13.5 13.5
Exemption for interest contribution
Amt of interest✕(receiving interest – exempted
interest )
Receiving interest
= 46,800 ✕ (13 - 9.5) =
13
= 46,800 ✕ 3.5
13
= 1,63,800
13
= 12,600 include in gross salary
Deductions from salaries
1. Standard deduction
2. Entertainment deduction
3. Tax on employment.
Tax on employment.
As per the constitution of India, the state
Government/local Authorities are empowered to
make law and collect taxes on profession, trade,
callings and employment.
i. Where professional tax is paid by the employer on
behalf of the employee, it will first be included in
his gross salary as a perquisite. Therefore, a
deduction on account of such professional tax
will allowed to the employee from his gross
salary.
ii. Professional tax due but not paid shall not be
allowed as deduction.
Ill. 4.43 X furnishes the foll. Particulars of his remuneration for
the previous year 2021-22 from R co. Ltd. Where he is
employed as an accountant:
D.A. (forming part of salary for retirement benefits) 2,000 p.m.
Children education allowance (for one child) 250 p.m.
Entertainment allowance 250 p.m.
He is entitled to use of a car (below 1.6. lts.) for official and
personal work.
He has paid 1,200 towards professional tax to state
government. Compute his income from salary for the
Ill 4.42 in illustration no 4.44, assume that the professional tax
of Rs.1,200 is paid by the employer on behalf of the
employee. Compute the income from salary.
Q.9 Mr. Lal is employed in Bharat textiles Ltd. Mumbai on a
monthly salary of 20,000. In addition to this fixed salary, he is
entitled to a commission @5% on the sale made by him.
During the previous year 2021-22, he had received foll.
Allowances and amenities.
i. Dearness allowance @2,000 p.m. Which is granted to him
under the terms of employment and counted for retirement
benefits.
ii. Bonus equal to two months salary.
iii. House rent allowance @5,000 p.m.
iv. Entertainment allowance @250 p.m.
v. The co. Paid 1,000 as his income-tax penalty.
vi. In September, 2021 during leave he went on a visit to
Kashmir with his family. The expenditure amounting to
16,000 as passage money by air were paid to him by
vii. He had been provided with the amenities of gas,
electricity and water, the expenses of which amounting
to 12,000 were paid by the co.
viii. Commission on sales of 10,00,000 @5%.
ix. He was given titan watch worth 9,000 by his employer
on the foundation day of the co.
x. He and his employer each contributed 12.5% of his
salary to recognised provident fund. The interest
credited to this fund for the previous year at 13.5% rate
of interest amounted to 27,000.
Compute the taxable income from salary of Mr. Lal for the
assessment year 2022-23 keeping in mind that he spent
6,000 p.m. As rent of the house hired by him.
Ans. 4,02,970.
Q. 9 Uday furnishes the foll. Details of his salary income for
the financial year 2021-22
1. Salary 10,000 p.m.
2. Dearness allowance 1,000 p.m.
3. Entertainment allowance 1,000 p.m.
4. Employer’s and his own contribution to the RPF is 10% of
salary.
5. Interest on the accumulated balance of RPF @13%.
26,000 = 26,000(13-9.5)/13 = 7,000
6. City compensatory allowances 100 p.m.
7. Medical allowances 5,000 p.a.
8. He is provided with car of 1.8 litres. Engine cubic capacity
rating by his employers. Excluding driver’s salary are met
by him. The car is used for official as well as for private
Particulars Amount amount
Sol.
Salary 10,000 ✕ 12 1,20,000
DA 12,000
ENTERTAINMENT ALLOWANCE 12,000
INTEREST ON RPF 7,000
CCA 1200
MEDICAL ALLOWANCE 5,000
CAR (900 + 900 = 1800 ✕ 12) 21,600
UNFURNISHED ACCOMMODATION AT CONCESSATIONAL 14,730
RATE (20,730 – 6,000)
SWEEPER 1800
WATCMAN 2400
GARDNER 1800
INTEREST ON LOAN 5%(12% - 7%) FOR 11 MONTHS 4583
1,00,000 ✕ 5/100*11/12 = 4583
Gross salary 204113
LESS: STANDARD DEDUCTION 50,000
LESS: ENTERTAINMENT ALLOWANCE ---- 50,000
Income from salary 1,54,113
9. He is also provided with an unfurnished
accommodation in Delhi for which is employer
charges 500 p.m. The fair rent of house is 24,000
per annum. The house is owned by the employer.
10. The employer has also engaged for him a sweeper
@150 p.m., a watchman @200 p.m. And Gardner
@150 p.m.
11. He has also been given a loan of 1,00,000 @7%
p.a. On 1.5.21 for construction of his house. SBI rate
for such loan as on 1.4.20 is 12% p.a.
Compute his taxable income from salary for the
Ans. 2,04,113
Q.7 Practical question 7
The following are particulars of Mrs. Sheetal income:

(i) Salary ₹1,14,000 per annum.
(ii) Dearness allowance (under the terms of employment) ₹12,000 per
annum.
(iii) Education allowance (for three children) ₹5,700 p.a.m
(iv)Medical allowance(actual expenditure 8,000)₹7,200p.a.m.
(v) Rent free house (in Ghaziabad population 15 lakhs) for which the company
paid ₹3,000 per month as rent. The house is furnished, and the rent of the
furniture is ₹2,000 p.a.m
(vi) A domestic servant, a sweeper and a watchman paid ₹250 per month
each by the company.
(vii) The company spent ₹4,000 on her refresher course.
(viii) Her contribution to R.P.F. ₹8,000 and employer's contribution ₹6,000.
(ix) The company has provided a free telephone at Mrs. Bhandari's residence
and paid bill amounting to ₹3,000.
(x) Professional tax ₹1,000 paid by Mrs. Sheetal.
Compute taxable "Income from Salary" for the assessment year 2022-23.
• Sol.
Salary 1,14,000
Dearness Allowance 12,000
Education allowance (₹5,700 – 2,400) 3,300
Medical Allowance 7,200
Rent Free Furnished Accommodation (₹20,475 + 2,000) 22,475
•Servant
A 250 × 12 3,000
Sweeper (250 × 12) 3,000
Watchman (250 × 12) 3,000
1,67,975
Less: Standard deduction 50000
Less: Professional tax u/s 16(iii) 1000 51,000
1,16,975
RFA
Salary = 1,14,000 + 12,000 + 3,300 + 7,200 1,36,500
15% of Salary of ₹1,36,500 (20,475) or ₹36,000, whichever is less 20,475
Add: cost of furniture 2,000 2,000

Since house is taken on rent by the employer, the population of 22,475
city has no relevance.
Free telephone and the amount incurred by employer on
reference course are tax free perquisites.
A
Sol. 13 salary 11,500 * 12 = 138,000 138,000
Rent free accommodation 20700
Hra 54,000 – 40,200 = 13800
Education allowance = 300 *12 = 3,600
less 100 * 12 = 12,00 2400
Education facilities = nil
telephone facility = nil
Telephone allowance = 12,000
Medical allowance/reimbursement = 18,000 18,000
Motor car facility = 18,000
Conveyance allowance = 18,000
Sweeper salary = 6,000
Gardner salary = 6,000
Watchman salary = 6,000 18,000
Total = 2,20,200 212,700
Less standard deduction = 50,000 50,000
Sol no 5
Salary 17,000 *10 + 18,000 *2 = 2,06,000
D.A. 20,600
Medical allowance 1500 * 12 = 18,000
Conveyance allowance 3,000*6 = 18,000
Telephone expenses = tax free
Electricity and water bills = 5,500
Value of rent free accommodation = 26,625
Employer’s contribution 2 ½% = 5,150
Interest on PF excess 9.5% = 3000
Motor car 1800+900 = 2700* 6 = 16,200
Less standard deduction = 50,000
12,500 (12.5 – 9.5)/12.5 = 3,000
Date of joining 1.2.2019 16,000
1.2.2019 to 31/1/2020 16,000 p.m.
1.2.2020 to 31/1/2021 17,000 p.m. (1.4.20)
1.2.21 to 31.1.22 18,000
financial year 1/4/2020 to 31/3/2021
17,000 * 10 + 18,000 *2 = 2,06,000
177500 *15/100 = 26625

RPF Exempt 12% - 14.5% = 2.5% *206,000 = 5150
Interest= 12,500 (12.5 – 9.5)/12.5 = 3,000
Note Q .12 PAGE NO 148
NOTE:- Allowance and Perquisite received outside
India are exempt as he is a citizen of India and an
employee of Government of India posted out of India.
Gratuity Q . NO 8 PAGE 147
1. 1,50,000 receive
2. 20,00,000
3. ½ *average salary *no of completed years
½ * 11,500 *25 = 1,43,750
1,50,000 – 1,43,750 = 6,250 gross salary include
ANS 85,850 166250

Chapter 4 Income Under the Head Salaries (4)

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Income under the head salaries

Grade pay system

April 2023 1 may 2023 6 may 2023

a Actual HRA received (30,000 × 3) 90,000

Total H.R.A 30,000 × 12 = 3,60,000

2) An employee who has substantial interest in the employer-

Compute his net monetary income

(c) Allowances which are exempted from payment of

The perquisite value of unfurnished accommodation

Since the rent-free accommodation has been given for

15% of salary shall be 49,176

9,600 + 4,800 + 12,000 + 7,200 + 6,240 = 3,27,840

He has been provided with a rent free accommodation in

(a) The value of unfurnished accommodation in this

He is provided with a rent-free unfurnished accommodation which is

He was entitled to HRA of 16,000 p.m. from 1.4.2020

41,80,000 ❎ 10/100 ❎ 1/12 = 34,833

D.A. 50% 1,80,000

Meaning of salary of rent-free accommodation ₹3,60,000 + 1,08,000

(b) if the expenditure is incurred wholly any exclusively for Nil

The amount determined in clause (a) shall be reduced by any amount

The amount determined in clause (b) shall be reduced

Value of use of video camera for 1.4.2020 to 31.10.2020 i.e.

Personal Employer Expenses incurred by employer

(ii) is used exclusively for the private Actual amount of expenditure

Personal Employer Expenses incurred

If the supply is from the value of the perquisite

Other Educational Facilities

The contribution by an employer to an approved

The entire 10,900 shall be taxable perquisite

Meaning of salary = Basic salary + D.A. (no

s.no Particulars amount

April 2019 to June, 2019 ₹15,600 × 3 46800

D.A. @ 15% 46,800

1.7.2017 date of salary fixed 14,800

Particulars A Ltd. B Ltd.

Date of Retirement 1.12.2020 15.11.2020

Salary (A Ltd. 10,000 × 8) 80,000

(B Ltd. 6,000 × 31/2 + 5,500 × 4) 43,000

D.A. 30% OF SALARY 24,000 12,900

From A Ltd. 1,43,000

Less: Exempt (See working note) 1,40,140 2,860

From B Ltd. 1,20,000

Less: Exempt (See working note) 63,280 56,720

Therefore Total Gross Salary = ₹2,19,480

Computation of Average Salary

180000 = 1/2; = 180000*2 = 3,60,000

Note.—Average Salary = 16,500 × 8 + 17,000 × 2 =

4. Fully Exempt subject Accumulated employee's Fully

The following are particulars of Mrs. Sheetal income:

Add: cost of furniture 2,000 2,000

177500 *15/100 = 26625

1,50,000 – 1,43,750 = 6,250 gross salary include

ANS 85,850 166250

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