BCOM(H) Vth SEM

INCOME FROM SALARIES

SALARIES
Any remuneration paid by an employer to his employee in consideration of his services
is called salary. It includes monetary value or non monetary value of benefits and
facilities provided by an employer which are taxable. Any amount received other
than from employer cannot be termed as salary. For e.g., A Member of Parliament /
a MLA is not treated as an employee of the Government therefore salary and
allowance received by him is not chargeable to tax under the head income from
salary.

Under section 15, the following incomes are taxable under the head ‘Salaries’:

(a) The salary due from an employer or former employer to an assessee in the
previous year, whether paid or not;
(b) The salary paid or allowed to him in the previous year by or on behalf of
an employer or a former employer though not due or before it becomes
due to him;
(c) Any arrear of salary paid or allowed to him in the previous year by or on
behalf of an employer or a former employer, if not charged to income tax
for any earlier previous year.

Under the provisions of this section the amount of salary due in the year, amount
of advance salary received and the amount of arrears of salary received during the
year from the present or past employer are to be included in this head.

If any salary paid in advance is included in the total income of any person for
any previous year, it shall not be included again in the total income of the person
when the salary becomes due.

Any salary, bonus, commission or remuneration due to or received by a partner

of a firm from the firm shall not be regarded as salary for the purposes of section 15.

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
Some Important Points regarding Salaries

1. Salaries. Every kind of remuneration of every kind of servant, public or

private, and however highly or lowly placed he may be, is covered under the
scope of this term used in the Income Tax Act. It means that for the purposes of
the Income Tax Act, there is no distinction between the wages of labourer and
salaries of high officials.

2. Foreign Salary and Pension. Salary and pension received from foreign
government is taxable under the head ‘Salaries’.

3. Relationship of employer and employee. It is very essential for a payment

to fall under the head ‘Salaries’ that the relationship of employer and
employee must exist between the payer and payee. Every servant is an
employee but an agent may or may not be an employee.

4. Salaries and professional income. Where the employment is merely incidental

to the exercise of a profession the income from such employment would be
professional income, taxable under the head “profit and gains of business or
profession”. When a person occupies a regular post or office amounting to
service, it is employment as distinct from mere engagement in the course of the
profession.

5. Receipts from person other than employer. Perquisites or profits or any

remuneration received from person other than the employer would be taxable
under the head ‘Income from Other Sources’ even if they accrue to the
employee by reason of his employment. For example, remuneration received by
a professor of a college for acting as an examiner in a University or Board.

6. Payment made after cessation of employment. Payment made by an employer

to his employee after the cessation of his employment is also taxable under the
head ‘Salaries’. It is taxable under this head because it represents
remuneration for services rendered in the past.

7. Payment made to employee or to the widow or legal heir. a) Lump-

sum payment made gratuitously or by way of compensation or otherwise to
the widow or other legal heirs of an employee, who dies

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
while still in active service, will not be taxable as income.

b) Where a person or his heir receives exgratia payment from the Central
Government / State Government / Local Authority / Public Sector
Undertaking, consequent upon injury to the person / death of a family
member, while on duty is not liable to income tax.

8. Pension. Pension received by an employee after his retirement is taxable as

salary. Pension earned and received abroad is taxable only in the case of
ordinary resident, whether remitted to India or not. Pension paid by a foreign
government to its employees serving in India is also taxable.

9. Tax-free salary. When a salary is paid tax-free, the employee has to include in
his total income the gross salary, i.e., the aggregate of the net salary received
plus the amount of tax paid on his behalf by the employer, except under the
provisions of Sec.10 (10CC).

10. Deductions by employer. If, an employer makes certain deductions out of

the salary payable to an employee, amount so deducted is deemed to be
received by the employee and the amount so deducted is also taken as
application of income by the employee.

11. Salary of a Member of Parliament. This is not chargeable under the head
‘Salaries’, as a Member of Parliament is not an employee of the Government.
It is taxable under the head ‘Income from Other Sources’.

12. Salary of a Partner. Any salary received by a partner from the firm in
which he is a partner is not chargeable under the head ‘Salaries’. It is taxable
under the head ‘Profits and Gains of Business or Profession’.

13. Family Pension. Any family pension received by the widow or legal heirs of a
deceased employee is taxable under the head ‘Income from Other Sources’.

14. Voluntary foregoing - Application of Salary. Voluntary foregoing of

salary by an employee is simply an application of income by him and,

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
therefore, any voluntary foregoing of salary is taxable when it is due, whether
paid or not u/s 15.

15. Salary Grade or Scale of Pay. Salary grade means that at what starting salary
any employee is to be appointed and during the entire service period(if there is
no revision of grade or no promotion), what will be his increment per year and
what will be his maximum salary after which there will be no increment. Here
salary means basic salary.
For example, 8,000-250-10,000-375-12,000-450-18,800.

16. Salary from the former employer, present employer or prospective

employer. The salary is taxable irrespective of whether it is received from the
present, past or prospective employer. As any income received by the recipient
in the relationship of employer and employee is taxable under the head income
from salaries.

17. Salary from more than one employer. Salary and other service benefits
received by an assessee from more than one employer in the same financial
year are taxable as salary in the year of receipt.

18. Salary is taxable on due or receipt whichever is earlier. The salary

income is taxable either on due or receipt basis whichever is earlier.

19. Gross Salary is taxable. While taxing the salary income it is the gross salary
that is taxed not the net or take home salary. Hence any amount if deducted
from gross salary has to be added to net salary.

20. Due date of Salary. Following are the general rules regarding this:
(a) In the case of employees of the government and semi-government.
Salary for a particular month is due on the first of the next month. Thus, in such
a case, salary for the month of March of the preceding financial year upto the
salary for the month of the current financial year is taken into account.

(b) In the case of employees of banks and non-government bodies.

Salary for a particular month is due on the last date of the same month. Thus,
in such a case salary for April of the current financial year upto

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
the salary for the month of March of the current financial year is taken into
account.
Definitions:
SALARY (Sec. 17 (1)): Salary includes:
1. Wages;
2. any annuity of pension;
3. any gratuity;
4. any fees, commission, perquisites, profit in lieu of salary or in addition to
any salary or wages;
5. any advance of salary; but not loan for purchasing a car, scooter or a house
etc.
6. any payment received by an employee in respect of any period of leave not
availed of by him;
7. employer’s contribution towards recognized provident fund in excess of 12%
of the employee’s salary and interest on provident fund in excess of 9.5%
rate.
8. the aggregate of all sums comprised in the transferred balance to the extent
to which it is chargeable to tax under sub-rule (4) of Rule 11.
9. the contribution made by the Central Government or any other employer in
the previous year, to account of an employee, under a pension scheme.

Salary

Basic salary + allowances + Perquisites + Profits in lieu of salary

Gross Salary
Less : (Deductions u/s 16)

Standard Deduction + Entertainment Allowance + Employment Tax

= Taxable salary

Different forms of salary

Different forms of salary are: Leave salary, compensation for

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
retrenchment, fees and commission, bonus, death-cum-retirement gratuity,
commutation of pension, receipts by employees of public sector and other companies
at time of voluntary retirement, annuity, salary and pension from UNO and other
foreign pension.

ALLOWANCES

Payment in cash made by an employer to his employees monthly, other than

salary, is called allowance. It is a fixed sum of money paid regularly in addition to
salary for the purpose of meeting some particular requirement connected with the
services rendered by an employee.

For the purpose of Income tax, Allowances are divided into three categories. They
are:

1. Taxable Allowances
2. Allowances Exempt up to Specified Limit
3. Fully exempted Allowances

Taxable Allowances

1. Dearness Allowance, Additional D.A and Dearness Pay:

This is a very common allowance these days on account of high prices.
Sometimes additional D.A is also given. It is included in the income from salary
and is taxable in full. Sometime it is given under the terms of employment and
sometimes without it. When it is given under the terms of employment it is
included in salary for purposes of determining the exemption limits of HRA,
RPF, gratuity and for determining the value of rent-free house and is also taken
into account for the purposes of retirement benefits.
Sometimes D.A is given as ‘Dearness Pay’. It means that it is being
given under the terms of employment.

2. Fixed Medical Allowance. It is fully taxable.

3. Tiffin Allowance. It is given for lunch and refreshments to the

Anjanee Kumar Rai
Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
employees. It is also called Meal Allowance and Refreshment
Allowance. It is fully taxable.

4. Servant Allowance. It is fully taxable even if it is given to low paid employee,

not being an officer.

5. Non-Practicing Allowance. It is generally given to those medical doctors

who are in government service and they are banned from doing private
practice. It is to compensate them for this ban. It is fully taxable.

6. Hill Allowance. It is given employees working in hilly areas on account of

high cost of living in hilly areas as compare to plains. It is fully taxable, If the
place is located at less than 1,000 meter height from sea level.

7. Warden Allowance and proctor Allowance. These allowances are

given in educational institutions for working as Warden of the hostel and / or
working as Proctor in the institution. These allowances are fully taxable.

8. Deputation Allowance. When an employee is sent from his permanent place of

service to some other place or institution on deputation for a temporary period,
he is given this allowance. It is fully taxable.

9. Overtime Allowance: When an employee works for extra hours over and
above his normal hours of duty he is given overtime allowance as extra wages.
It is fully taxable.

10. Other Allowances: There may be several other types of allowances, for
example, Family Allowance to armed personnel while on field without family,
Project Allowance, Marriage Allowance, Rural Allowance, City Compensatory
Allowance, Telephone Allowance, Dinner Allowance, Health Allowance,
Holiday Allowance, Special Qualification Allowance, etc. These are taxable
unless specifically exempted.

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM

Allowances exempt upto specified limit

1. House Rent Allowance: An allowance granted to an assessee by his employer to
meet expenditure incurred on payment of rent in respect of residential
accommodation occupied by him exempt from tax to a certain extent.

Rule 2A prescribed that the least of the following amounts shall be exempt:

(a) House Rent Allowance actually received by the assessee; or

(b) Excess of rent paid by the assessee over 10% of salary due to him for the relevant
period; or
(c) (i) if the accommodation is situated at Mumbai, Kolkata, Delhi or
Chennai – 50% of salary
due to the assessee, and
(ii) if the accommodation is situated at any other place – 40% of salary due to
the assessee.

In case an employee is living in his own house and is getting HRA or is living in a
house for which he is not paying any rent, full amount of HRA receivable is taxable.
In this rule- (i) ‘Salary’ includes dearness allowance, if the terms of employment so
provide. It also includes the commission based on fixed percentage of
turnover, but excludes all other allowances, perquisites and bonus.

(ii) ‘Relevant period” means the period during which the said
accommodation was occupied by the assessee during the previous
year. It means that the salary of the period during which rented
accommodation is not occupied by the employee will be excluded.

House Rent Allowance (HRA)

Employee who is residing in his own Employee who is paying

rent for residential
house or in a house where he doesn’t accommodation
pay any rent, entire HRA is taxable
Anjanee Kumar Rai
Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
Least of the following is exempt:
a) HRA actually received
b) Rent paid – 10% of salary
c) 40% of salary OR (50% in case
residing in Delhi, Mumbai, Chennai or
Kolkata)

2. Entertainment Allowance: It is an allowance given by an employer to his

employee. It is first included in the income from salary under section 15, and then
deduction is allowed to a government employee under section 16(ii).

3. Special allowance for meeting certain expenditure [Section 10(14)]:

Special allowances which are exempt from tax while computing income under the
head ‘salaries’ have been notified by the Central Government. There are two types of
special allowances. They are:

A. Those which are exclusively to be incurred in the performance of the duties of his
office. These are exempt to the extent actually spent.
B. Those which are to meet the personal expenses. These are exempt upto specified
limit.

A. Those which are exclusively to be incurred in the performance of the

duties of his office Sec.10(14) (i):
Special allowance which is granted to meet expenses wholly, necessarily and
exclusively incurred in the performance of the duties of an office will be exempt from
tax, to the extent to which such expenses are actually incurred for that purpose and
notified by the Central Government.

The following special allowances have been notified as exempt u/s

10(14) (i):
1) Travelling Allowance: The allowance granted to meet the cost of travel on tour
or on transfer. The cost of travel on transfer includes any sum paid in connection
with transfer, packing and transportation of personal effects on such transfer.

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM

2) Daily Allowance: Any allowance, granted for the period of journey on tour or on
transfer to meet the ordinary daily charges incurred by an employee on account
of absence from his normal place of duty.

3) Conveyance Allowance: The allowance granted to meet the expenditure incurred

on conveyance in the performance of duties of an office or employment of profit.

4) Helper Allowance: Any allowance granted to meet the expenditure incurred on

a helper where such helper is engaged for the performance of official duties.

5) Academic Allowance: Any allowance granted for encouraging the academic,

research and other professional pursuits.

6) Uniform Allowance: Any allowance granted to meet the expenditure incurred on

the purchase or maintenance of uniforms for wear during the performance of
official duties.

B. Special Allowance to meet the personal expenses.

Any such allowance granted to the assessee either to meet his personal expenses
at the place where the duties of his office are ordinarily performed by him or at a place
where he ordinarily resides, or to compensate him for the increased cost of living, will
be exempt from tax, to the extent notified by the Central Government.

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM

1) Special Compensatory (Tribal Areas/Scheduled Areas/Agency Areas)

Allowance: The exemption is available @ Rs. 200 p.m. in Madhya Pradesh,
Tamilnadu, U.P, Karnataka, Tripura, Assam, West Bengal, Bihar, and
Orissa.

2) Any allowance granted to an employee working in any Transport System:

Any allowance granted to any employee working in any transport system to meet his
personal expenditure during his duty performed in the course of running of such
transport from one place to another place is exempt in the whole of India upto 70%
of such allowance or Rs. 10,000 per month, whichever is less.

3) Children Education Allowance: It is exempt in the whole of India @ Rs. 100

per month per child upto a maximum of two children.

4) Children Hostel Allowance: Any allowance granted to an employee to meet

the hostel expenditure on his child is exempt in the whole of India @ Rs. 300 p.m per
child upto a maximum of two children.

5) Transport Allowance: The transport allowance granted by the Government to

its employees or by an employer to employees, by whatever name called, to
compensate them for the cost incurred on account of commuting between the place
of residence and the place of duty, will be exempt subject to a maximum of
Rs.1600p.m. (No exemption, w.e.f assessmet year 2019-20).

However, if the employee is blind or orthopedically handicapped with disability

of lower extremities, the transport allowance shall be exempt upto Rs. 3,200 pm.

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM

6) Underground Allowance: It is granted to an employee who is working in

uncongenial, unnatural climate in underground mines. It will be exempt subject to a
maximum of Rs. 800 pm.

7) Compensatory Field Area Allowance: It is exempt upto Rs. 2,600 p.m

8) Compensatory Modified Field Area Allowance: It is exempt upto Rs.

1,000 p.m

9) Counter-insurgency Allowance: It is exempt upto Rs. 3,900 p.m

10) High Altitude Allowance:

(a) For altitude of 9,000 to 15,000 feet – It is exempt upto Rs.1,060 p.m

(b) For altitude above 15,000 feet – It is exempt upto Rs. 1,600 p.m

11) Highly Active Field Area Allowance: It is exempt upto Rs.4,200 p.m.

12) Island Duty Allowance: It is exempt upto Rs. 3,250 pm

Fully Exempted Allowances:

(1) Foreign Allowance: This allowance is usually paid by the government to an Indian
citizen outside India for rendering service abroad. It is not taxable at all. There may be
several types of foreign allowances, e.g., Overseas Allowance, Children Education
Allowance, Car Allowance, Entertainment Allowance, etc.

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
This exemption is not available to non-government employees and to those who are
not citizens of India.

(2) Sumptuary Allowance to High Court or Supreme Court Judges. Such

allowance given to high court/supreme court judges is fully exempt from tax.

(3) Allowance from UNO: Allowance paid by a UNO to its employees is fully exempt
from tax.

(4) Per-diem Allowance: If per-diem allowance is paid for the purposes of use of
hotel, boarding and lodging facilities to an employee any surplus accruing to him from
such allowance is exempt from tax.

PERQUISITES

The term ‘perquisite’ means any benefit, attached to an office or position in

addition to salary or wages. Perquisite denotes a personal advantage. It may be given
in cash or in kind. If it is given in kind it should be capable of being measured in terms
of money. For income tax purposes we limit the scope of perquisites to the benefits
received in kind and which are convertible in terms of money. Perquisites received in
cash are termed as allowances for income tax purposes.

1. Perquisites Taxable in case of all employees:

The following perquisites are taxable in case of all employees:

1) The value of residential accommodation provided to the assessee by his

employer

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
2) Any sum paid by the employer in respect of any obligation which, but for such
payment, would have been payable by the assessee. For example-
a) Payment by the employer of the employee’s club or hotel bills provided
that theyt are not connected with the employer’s business;

b) Payment by the employer of any loan due on this employee;

c) Payment by the employer of education expenses of the children of his

employees;

d) Payment by the employer of the salary of the domestic servant of an

employee meant for his personal use and employed by the employee;

e) Income tax paid by the employer in respect of the salary of his employee;
f) Legal expenses incurred by the employer to save or defend the employee;
3) Any sum payable by the employer, whether directly or through a fund, other than
a recognized provident fund or an approved superannuation fund or a Deposit-
linked Insurance Fund, to effect an insurance on the life of the employee or in
respect of a contract for an annuity.

4) The value of any specified security or sweat equity shares allotted or transferred
directly or indirectly by the employer or former employer free of cost or at
concessional rate to the assessee.

5) The amount of any contribution to an approved superannuation fund by the

employer in respect of the assessee, to the extent exceeding Rs. one lakh fifty
thousand.

6) The value of any other fringe benefit or amenity as may be prescribed.

In terms of provisions of Sec. 17(2) (viii), the value of the following benefits
or amenities shall be included in the income of an employee:

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
1. Interest free or concessional loan;

2. Holiday enjoyment;

3. Free food;

4. Gift;
5. Expenses charged to a credit card;

6. Club expenses;

7. Use of movable asset;

8. Transfer of movable asset;

9. Any other benefit or amenity

2. Perquisites Taxable in the case of specified employees only

Specified Employees: The employees who fulfil any of the following three
conditions are called specified employees:
a) A Director – employee: An employee, who is also a director in the
employer-company whether full-time or part-time and whether continuing as
director for the whole or part of the ear, is a specified employee.

b) Employee having substantial interest in the employer-company:

An employee is said to have substantial interest in the employer- company if he
is the beneficial owner of equity shares carrying not less than 20% of voting
power. He is also termed as a specified employee.

c) Any other employee(i.e. not covered by the above two conditions) whose
income chargeable under the head Salaries, including all monetary payments
from one or more employers, but excluding the value of all benefits or amenities
given in kind, exceeds Rs. 50,000 is called a specified employee.

The following are the taxable perquisites in hands of specified

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
employees:

1) Facility of Car;

2) Sweeper, Watchman, Gardener and Personal attendant;

3) Gas, electric energy and water;

4) Education facility to the members of employee’s household;

5) Transport facility.

3. Tax-free Perquisites

The value of the following perquisites shall not be included in the salary income of
an employee:

1. Medical benefits

2. Tea or snacks provided free in office or factory (work place)

3. Residential accommodation provided at site

4. Expenses on telephones including mobile phone

5. Employer’s contribution to Staff Group Insurance Scheme

6. Scholarships to employees or their children paid by the employer

7. The facility of conveyance provided by the employer from residence to

place of employment and vice-versa

8. Refresher courses, etc. If the employer pays fees for an employee taking
refresher courses or management course in order to enable, the employee to
perform his services more efficiently. Such expenses are treated as scholarship

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
9. Tax paid by the employer on the value of perquisites

10. Perquisites to Government employees posted abroad: Any perquisite

allowed outside India by the Government of India to a citizen of India for
enduring service outside India. This exemption is not available to non-
government employees and also to those who are not citizens of India

11. Rent-free house and conveyance facility provided to High Court Judges
12. Rent- free house and conveyance facility provided to Supreme Court
Judges
13. The value of rent-free furnished residence provided to a Minister,
specified officers of Parliament or a Leader of the Opposition in Parliament

14. Laptops and computers provided by the employer for personal use of
employee or any member of his household

15. Interest- free or concessional loan, if the amount of loan in aggregate

does not exceed Rs. 20,000 during the ‘Previous year”.

16. Transfer without consideration to an employee of a movable asset(other

than computers, electronic items and car) by the employer after using it for a
period of ten years or more

17. Periodicals and journals required for discharge of work

18. Leave travel concession u/s 10(5).

MEDICAL BENEFITS

1. Medical Treatment within India;

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
a) The value of any medical treatment provided free to an employee or any
member of his family in any hospital maintained by the employer;
b) Any sum paid by the employer in respect of any expenditure incurred by
the employee on medical treatment of himself and members of his family

(i) in a hospital maintained by government or any local authority or

approved by the government for medical treatment of its employees;

(ii) in respect of the prescribed diseases or ailments in any hospital

approved by the Chief Commissioner.

c) Premium paid by the employer on the health insurance of the employee (

including members of his family), under an approved scheme, or group medical
insurance by the employer for his employees (including members of their
families);

d) Reimbursement by the employer of any premium paid by the employee

on his health insurance or on the health insurance of any member of his family
under an approved scheme;

e) Limited Exemption: If the medical treatment of the employee or any

member of his family is done at any private hospital, nursing home or clinic other
than those stated in clauses (a) and (b) above the exemption will be restricted to
Rs. 15,000. No exemption w.e.f. the Assessment Year 2019-20.

2. Medical Treatment outside India:

a) If the employer incurs any expenditure on the medical treatment of the

employee or any member of his family outside India, to the extent permitted by
the RBI; and

b) If the employer incurs any expenditure on travel and stay abroad

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
of the patient (employee or any member of his family) and one attendant who
accompanies the patient in connection with such treatment, it will be exempt
subject to the conditions that (i) the expenditure on medical treatment and stay
abroad will be exempt to the extent permitted by the RBI and (ii) the expenditure
on travel shall be exempt in the case of an employee whose gross total income
(excluding this expenditure) does not exceed Rs. 2 lakh.

VALUATION OF PERQUISITES
Tax-free perquisites are not to be valued at all. Those perquisites which
are either taxable in all cases or in specified cases are to be valued.

1. VALUATION OF RESIDENTIAL ACCOMMODATION

For the purpose of determining the value of residential accommodation provided by

the employer, the employees have been divided into two categories:

(1) Government Employees:

These include the employees holding office or post in connection with the affairs
of union or State or serving with anybody or undertaking under the control of such
Government on deputation.

Valuation: The value of the rent-free unfurnished house will be taken to be the licence
fee determined by the Government in accordance with the rules framed by Government
for allotment of residences. If the accommodation is furnished, the value of the
perquisite will first be computed on the above basis and then increased by an amount
equal to 10% per annum of the original cost of the furniture (including refrigerators,
television sets, radio sets, air-conditioning plant or equipments other household
appliances) provided. If such furniture is hire by the employer the hire charges payable
for the furniture will be taken into account.

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
From the above value, if any amount is paid or payable by the employee during the
previous year shall be reduced and the balance shall be the value of perquisite.

Computation of value of Residential Accommodation in case of Govt.

Employees

Amount determined as per Government Rules xxxxx

Add: 10% p.a. of cost of furniture or Hire charges, if any
xxxxx

xxxxx

Less: Amount paid or payable by the employee (if any) xxxxx

Value of Accommodation xxxxxx

(2) Other Employees:

(a) Accommodation owned by employer:

(i) 15% of salary in cities having population exceeding 25 lakh as per 2001 census,
(ii) 10% of salary in cities having population exceeding 10 lakh but not
exceeding 25 lakh as per
2001 census,

(iii) 7.5% of salary in any other places,

in respect of the period during which the accommodation was occupied by the employee
during the P.Y.

(b) Accommodation is taken on lease or on rent by the employer:

Actual amount of lease rental paid or payable by the employer or 15% of salary,
Anjanee Kumar Rai
Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
whichever is lower, will be the value of accommodation.

Where the accommodation is furnished 10% p.a. of the cost of furniture shall be
added to the above value. If the furniture is hired by the employer the hire charges
payable for the furniture will be taken into account.

From the above value, if any amount is paid or payable by the employee during
the P.Y. shall be reduced and the balance shall be the value of perquisite.

(c) Accommodation provided in a Hotel:

Where the accommodation is provided by the employer (Government or non-

Government) to the employee in a hotel, its value shall be as under:
(i) Where the accommodation is provided on his transfer from one place to another
and the period in aggregate does not exceed 15 days- the value shall be taken as
nil.

(ii) In any other case, the value shall be taken 24% of salary paid or payable for the
previous year
(for the period during which such accommodation is provided) or the actual charges
paid or payable to such hotel, whichever is less.

From the above value, if any amount is paid or payable by the employee shall be
reduced and the balance shall be the value of perquisite.

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM

(d) Accommodation provided at site:

Where the accommodation is provided to an employee working at a mining site

or an onshore oil exploration site or a project execution site or a dam site or a power
generation site or an off-shore site which:

(i) being of temporary nature and having plinth area not exceeding 800 square feet, is
located not less than 8 k.m. away from the local limits of any municipality or
cantonment board; or

(ii) is located in a remote area, the value of such accommodation shall be taken as nil.

(e) Accommodation at the time of transfer:

Where on account of transfer of an employee from one place to another, he is
provided with accommodation at the new place of posting while he retains the
accommodation at the other place, the value of perquisite shall be taken for one
accommodation which has lower value.

2. VALUATION OF MOTOR CAR

(1) Car owned or hired by the employer. Car is used wholly and exclusively
in the performance of his official duties.
Value shall be taken as nil provided the prescribed conditions are satisfied.

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
(2) Car owned by employer and it is used exclusively for the private or
personal purposes of the employee or any member of his household:

Actual amount of expenditure incurred on the running and maintenance of motor

car xxxxx
Add: (i) Remuneration, if any, paid to the chauffeur (driver) xxxxx
(ii) Depreciation @ 10% p.a. of the actual cost of the motor car
xxxxx

xxxxx
Less: Amount charged from the employee if any
xxxxx
Value of perquisite
xxxxxx

(3) Car is taken on lease and it is used exclusively for the private or
personal purposes of employee or any member of his household:
Amount spent on running and maintaining the car xxxx

Add: Remuneration, if any, paid to the chauffeur (driver) xxxx

xxxxxx

Less: Amount charged from the employee xxxx

Value of perquisite xxxxxx

(4) Car owned or hired by employer. Car is used partly in the performance of
duties and partly for private or personal purposes of employee or any
member of his household:

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
(a) If the entire expenses of maintenance and running of the motor car are
borne by the employer:
(i) Small car (Cubic capacity of engine of the car does not exceed 1.6 litre) Rs.
1,800 p.m.

(ii) Large car (Cubic capacity of engine of the car exceeds 1.6 litre)
Rs.2,400 p.m.

If chauffeur is also provided, add Rs. 900 p.m.

(b) If the expenses of maintenance and running for his private or

personal purpose are met by the assessee (i.e., the employee):
(i) Small car Rs. 600 p.m.

(ii) Large car Rs.900

If chauffeur is also provided, add Rs.900 p.m.

(5) Employee uses more than one car for private purposes:
Where more than one motor car is owned or hire by the employer and the
employee or any member of his household is allowed the use of such motor cars
(otherwise than wholly and exclusively in the performance of duties), the value of
perquisite shall be:

a) In respect of one car:

(i) Small car Rs. 1,800 p.m. (ii) Large car Rs. 2,400 p.m. If
chauffeur is also provided, add Rs.900 p.m.
b) In respect of other car / cars:
Assuming the car / cars is used exclusively for private purposes and the value
shall be determined as discussed in 2 if the car is owned by the employer or as
discussed in 3 if the car is taken on lease by the employer.

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
(6) Car owned by the employee;

(a) The actual running and maintenance charges (including chauffeur’s

remuneration) are met or reimbursed by the employer and such
reimbursement is for the use of the car wholly and exclusively for official purposes-
Value shall be taken as nil provided the prescribed conditions are satisfied.

(b) Where reimbursement of expenses of the car is wholly for personal purposes of the
employee or any member of his household- Value shall be taken equal to amount
reimbursed.

(c) Where reimbursement of expenses of the car is partly for official

purposes and partly of personal purposes of the employee or any member
of his household:

(i) Small car- The value of perquisite shall be the actual amount of expenditure
incurred by the employer less Rs. 1,800 p.m. + Rs. 900 p.m. for chauffeur, if any,
provided the prescribed conditions are satisfied.

(ii) Large car – The value of perquisite shall be the actual amount of expenditure
incurred by employer less Rs/. 2,400 p.m. + Rs.900 p.m. for chauffeur, if any, provided
the prescribed conditions are satisfied.

Prescribed Conditions: Where it is claimed that vehicle is used wholly and exclusively
in the performance of official duty or the actual expenses on running and maintenance
of the vehicle, owned by the employee, for official purposes are more than prescribed
amount (Car Rs.1,800/Rs.2,4000 p.m. as the case may be and other automotive Rs.900
p.m.), the following documents should be maintained:

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
(a) Complete details of journey undertaken for official purpose which may include
date of journey, destination, mileage and the amount of expenditure incurred.
(b) A certificate of the employer to the effect that the expenditure was incurred
wholly and exclusively for the performance of official duties.

3. SWEEPER, GARDNER, WATCHMAN OR PERSONAL ATTENDANT

Where the employer provides to his employee or his household services of a

sweeper, a Gardner, a watchman or a personal attendant, the value of the perquisite
shall be the total amount of salary paid or payable by the employer or any other
person on his behalf, less the amount paid by the employee for such services.

4. GAS, ELECTRIC ENERGY OR WATER

(i) Where the employer provides gas, electric energy or water for household
consumption of the employee, the value of the benefit shall be the amount paid on that
account by the employer to the agency supplying the gas, electric energy or water.

(ii) Where such supply is made from resources owned by the employer (without
purchasing them from any other outside agency), the value of perquisite shall be the
manufacturing cost per unit incurred by the employer.

However, in both the cases, if employee is paying any amount in respect of such
services, the amount so paid shall be deducted from the aforesaid value.

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM
5. EDUCATION FACILITY

(A) Where an educational institution is itself owned and maintained by the employer
or where free educational facilities are allowed in any other educational institution by
reason of his being in employment of that employer, the value shall be:

(a) Education facility provided to children of the employee:

(i) if the cost of such education or the value of such benefit per child does not exceeds
Rs.1,000 p.m.-Nil
(ii) if cost or value exceeds Rs.1,000 p.m. – Cost of such education in a similar
institution in or near the locality less the amount recovered from the employee.

(b) Education facility provided in any other educational institution:

Cost of education in similar institution in or near the locality less the amount recovered
from the employee
(B) Education facility provided in any other educational institution: Education facility
provided to the children of the employee or other household members – The value shall
be the expenditure incurred by the employer.

6. TRASNSPORT FACILITIES

Where an undertaking is engaged in the carriage of passengers or goods and it

provides to any employee or to any member of his household for private journey free of
cost or at concessional fare, in any conveyance owned, leased or made available by
any other arrangement by the undertaking for the purpose

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM

of transport of passengers or goods – The value of the benefit or amenity shall be the
value at which such benefit or amenity is offered by the undertaking to the public.

If any amount is paid or recovered from the employee for such benefit or amenity,
it shall be deducted from the aforesaid value.

Note: In case of an employee of an Airline or the Railways, the value of transport

facility shall be exempt.

7. INTEREST ON FREE LOAN

• Interest on loan given to employee by the employer is exempted if the loan

amount is less than Rs.20,000

• If the loan amount is more than Rs. 20,000, the prevailing SBI rates have to be
taken for calculating perquisites. If the rate of interest charged by the employer
is below SBI rates, then the difference in the rate is taken as perquisites.

8. FREE FOOD, etc

The value of free food and non-alcoholic beverages provided by the employer
to an employee shall be as under:
a) Tea and snacks provided during working hours – nil.

b) Free food and no-alcoholic beverages provided during working hours in a

remote area or an off-shore installation – nil

c) Free food and non-alcoholic beverages provided during working hours at the
office or business premises or through paid vouchers which are not transferable
and usable at eating joints, the value thereof shall be the amount of expenditure
incurred by the employee as reduced by i) the amount paid or recovered from the
employee, and ii) Rs. 50 per meal.

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM

9. GIFT
The value of any gift or voucher or token in lieu of which such gift may be received by
the employee or by a member of his household on ceremonial occasions or otherwise
shall be sum equal to the amount of such gift.
Where the gifts are given to the employees on social and religious occasions like
Diwali, Christmas, New year, the anniversary of the organization, et., such gifts up to
Rs. 5,000 in the aggregate during the previous year would be exempt, beyond which it
would be taxed as perquisite.
However, gifts made in cash or convertible into cash, like gift cheque etc., shall
not be exempt.

PROFIT IN LIEU OF SALARY

Profit in lieu of salary includes the following:

1) The amount of any compensation due to or received by an assessee from his

employer or former employer in connection with the termination of his
employment or the modification of the terms and conditions relating to thereto.

2) Any payment due to or received by an assessee from an employer or a former

employer. Where an employer gives to his employee any sum by way of personal
gift and not in appreciation of his services, it is not taxable in the hands of the
employee.

3) Any payment made from unrecognized provident fund or other fund will be
included only to the extent of employer’s contributions and interest thereon.
Interest on employee’s own contribution is also taxable but it will be taxed under
the head ‘Income from Other Sources’ and not as salary income.

4) Any payment received under a Key man Insurance Policy including the amount of
Anjanee Kumar Rai
Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM

bonus.
5) Any amount due or received (whether in lump-sum or otherwise) by an
assessee from any person.

• Before joining any employment with that person; or

• After cessation of his employment with that person.

Deductions

The income chargeable under the head ‘Salaries’ shall be computed after making
the following deductions:

1) Standard Deduction up to Rs. 40000 [Sec. 16(ia)

2) Entertainment Allowance [Section 16(ii)]

3) Employment Tax [Section 16(iii)]

1) Entertainment Allowance: Amount granted as entertainment allowance to an

employee by his employer is included under the head ‘Salaries’ and then the
following deduction is allowed in this connection:

a) In the case of a Government employee:

1. Amount received;

2. 1/5 of basic salary;

3. Rs. 5,000 whichever is less

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi
 BCOM(H) Vth SEM

b) In the case of any other employee : Nil

Note: Any entertainment expenses incurred by the employee (whether
government employee or non-government employee) is not taken into
consideration at all.

2) Tax on Employment: Any sum paid by the assessee on account of a tax on

employment, leviable by or under any law, is allowable as deduction.

Notes: (1) If the amount of employment tax has been paid by the employer, it will be
added in salary income and then the deduction will be allowed.

Anjanee Kumar Rai

Assistant Professor
School of Management Sciences, Varanasi