Shyam Mikshra

A PROJECT ON:
“STUDY ON INCOME UNDER THE HEAD SALARY”

SUBMITTED BY:
SHYAM G. MISHRA
TY.BAF SEMESTER VI
UNDER THE GUIDE:
PROF. TUSHAR RAUT
SUBMITTED TO:
UNIVERSITY OF MUMBAI
ST.GONSALO GARCIA COLLEGE OF ARTS AND COMMERCE

VASAI, PALGHAR- 401202
ACADEMIC YEAR – 2018-19
1
A PROJECT ON:
“STUDY ON INCOME UNDER THE HEAD SALARY”

SUBMITTED BY:
SHYAM G. MISHRA
TY.BAF SEMESTER VI
UNDER THE GUIDE:
PROF. TUSHAR RAUT
SUBMITTED TO:
UNIVERSITY OF MUMBAI
ST.GONSALO GARCIA COLLEGE OF ARTS AND COMMERCE
VASAI, PALGHAR- 401202
ACADEMIC YEAR – 2018-19
2
CERTIFICATE
This is to certify that MR. SHYAM MISHRA has worked and duly
completed his project work for the degree of bachelor in commerce
(Accounting and finance) under the faculty of commerce in the subject of
and his project is entitled, “STUDY ON INCOME UNDER THE
HEAD OF SALARY” under my supervision.
I further certify that the entire work has been done by the learner under
my guidance and that no part of it has been submitted previously for any
degree or diploma of any university.
It’s is his own work and facts reported by his personal findings and
investigation
______________ ______ _____________
PRINCIPAL COORDINATOR
(DR. SOMNATH VIBHUTE) (ASS. PROF. RUBINA D’MELLO)
_______________ _____ _____________
PROJECT GUIDE: EXTERNAL EXAMINER
(PROF. TUSHAR RAUT)
____________________
INTERNAL EXAMINER
Date of submission:
3
DECLATION BY LEARNER
I the undersigned MR.SHYAM MISHRA Here by, declare that the work
embodied in this project work “STUDY ON INCOME UNDER THE
HEAD OF SALARY” forms my own conditioned to the research work
carried out by under the guidance of CMA.TUSHAR RAUT is a result
of my own research work and has not been previously submitted to any
university for any other degree/diploma to this or any other university
Wherever reference has been made to previous work of others, it has been
clearly indicated as such and included in the bibliography.
I, here by further declare that all information of this document has been
obtained and presented in accordance with academic rules and ethical
conduct
DATE:
__________________
SIGNATURE OF STUDENT
(SHYAM G. MISHRA)
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1
Acknowledgment
To list who all have helped me is difficult because they are so numerous
and the depth is so enormous.
I would like to acknowledge the following as being idealistic channels

and fresh dimensions in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me

chance to do this project.
I would like to thank my principal,“D.R SOMNATH VIBHUTE”for

providing the necessary facilities required for completion of this project.
I take this opportunity to thank our Coordinator “for her moral support
and guidance.
I would also like to express my sincere gratitude towards my project

guide “TUSHAR RAUT” Whose guidance and care made the project
successful.
I would like to thank my College Library, for having provided various

reference books and magazines related to my project.
Lastly, I would like to thank each and every person who directly or
indirectly helped me in the completion of the project especially my
Parents and Peers who supported me throughout my project.
ST. GONSALO GARCIA COLLEGE.

2
Sr. No. INDEX Page

No.
1.1 INTRRODUCTION
1.2 HISTORY
2.1 OBJECTIVE OF THE STUDY
3.1 REVIEW OF LITRATURE
4.1 DATA ANALYSIS
4.2 MEANING OF SALARY
4.3 DEFINATION OF SALARY
4.4 CHARACHTERISTIC OF SALARY
4.5 GROSS SALARY
4.6 COMPONENTS THAT FORM A PART OF
GROSS SALARY
4.7 COMPONENTS THAT DO NOT FORM PART
OF GROSS SALARY
4.8 DIFFERNCE BETWEEN GROOS SALARY &
NET SALARY
4.9 TAXABILITY OF VARIOUS COMPONENTS OF
SALARY
4.10 PROVIDENT FUND
4.11 DEDUCTION FROM SALARY
4.12 LEAVE TRAVEL ALLOWANCE
4.13 RETIREMENT BENEFIT
4.14 LEAVE SALARY
5.1 CONCLUSION
5.2 REFERENCE

3

4
1 INTRODUCTION TO THE PROJECT
A salary is a form of payment from an employer to an employee, which may be

specified in an employment contract. It is contrasted with piece wages, where each
job, hour or other unit is paid separately, rather than on a periodic basis. From the
point of view of running a business, salary can also be viewed as the cost of acquiring
and retaining human resources for running operations, and is then termed personnel
expense or salary expense. In accounting, salaries are recorded in payroll accounts.
Salary is a fixed amount of money or compensation paid to an employee by an

employer in return for work performed. Salary is commonly paid in fixed intervals,
for example, monthly payments of one-twelfth of the annual salary.
Salary is typically determined by comparing market pay rates for people performing
similar work in similar industries in the same region. Salary is also determined by
levelling the pay rates and salary ranges established by an individual employer. Salary
is also affected by the number of people available to perform the specific job in the
employer's employment locale. Salaries are fixed cost in nature.
So, I chosen this topic to understand various factors which affect the taxability of
salary
In India. Factors like perquisite and allowance various deductions and exemption
under the head salary which could be beneficial to the individual
To understand various retirement benefit like pension and gratuity retrenchment

benefit live encashment leave salary etc.

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HISTORY
First paid salary

While there is no first pay stub for the first work-for-pay exchange, the first salaried
work would have required a society advanced enough to have a barter system which
allowed for the even exchange of goods or services between tradesmen. More
significantly, it presupposes the existence of organized employers—perhaps a
government or a religious body—that would facilitate work-for-hire exchanges on a
regular enough basis to constitute salaried work. From this, most infer that the first
salary would have been paid in a village or city during the Neolithic Revolution,
sometime between 10,000 BC and 6000 BC.[2]
A cuneiform inscribed clay tablet dated about 3100 BC provides a record of the daily
beer rations for workers in Mesopotamia. The beer is represented by an upright jar
with a pointed base. The symbol for rations is a human head eating from a bowl.
Round and semi-circular impressions represent the measurements. [3]
By the time of the Hebrew Book of Ezra (550 to 450 BC), salt from a person was
synonymous with drawing sustenance, taking pay, or being in that person's service. At
that time, salt production was strictly controlled by the monarchy or ruling elite.
Depending on the translation of Ezra 4:14,[4] the servants of King Artaxerxes I of
Persia explain their loyalty variously as "because we are salted with the salt of the
palace" or "because we have maintenance from the king" or "because we are
responsible to the king".[5]
Salarium
The Latin word salarium originally "salt money" (Lat. sal, salt), i.e., the sum paid to
soldiers for salt.[6][7] ( The dictionary definition of salarium at Wiktionary) or the
price of having soldiers conquer salt supplies and guard the Salt Roads (Via Salaria)
that led to Rome.[8][9] But there is no evidence for this assertion at all.[10] Some
people even claim that the word soldier itself comes from the Latin sal dare (to give

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salt),[11] but mainstream sources disagree, noting that the word soldier more likely
derives from the gold solidus introduced by Diocletian in 301 AD.[12]
Roman empire and medieval and pre-industrial Europe
Regardless of the exact connection, the salarium paid to Roman soldiers has defined a
form of work-for-hire ever since in the Western world, and gave rise to such
expressions as "being worth one's salt".[13]
Within the Roman Empire or (later) medieval and pre-industrial Europe and its
mercantile colonies, salaried employment appears to have been relatively rare and
mostly limited to servants and higher status roles, especially in government service.
Such roles were largely remunerated by the provision of lodging, food, and livery
clothes (i.e., "food, clothing, and shelter" in modern idiom). Many courtiers, such as
valets de chambre, in late medieval courts were paid annual amounts, sometimes
supplemented by large if unpredictable extra payments. At the other end of the social
scale, those in many forms of employment either received no pay, as with slavery
(although many slaves were paid some money at least), serfdom, and indentured
servitude, or received only a fraction of what was produced, as with sharecropping.
Other common alternative models of work included self- or co-operative employment,
as with masters in artisan guilds, who often had salaried assistants, or corporate work
and ownership, as with medieval universities and monasteries.[13]
Commercial Revolution
Even many of the jobs initially created by the Commercial Revolution in the years
from 1520 to 1650 and later during Industrialisation in the 18th and 19th centuries
would not have been salaried, but, to the extent they were paid as employees,
probably paid an hourly or daily wage or paid per unit produced (also called piece
work).[13]

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Share in earnings
In corporations of this time, such as the several East India Companies, many
managers would have been remunerated as owner-shareholders. Such a remuneration
scheme is still common today in accounting, investment, and law firm partnerships
where the leading professionals are equity partners, and do not technically receive a
salary, but rather make a periodic "draw" against their share of annual earnings.[13]
Second Industrial Revolution
From 1870 to 1930, the Second Industrial Revolution gave rise to the modern
business corporation powered by railroads, electricity and the telegraph and
telephone. This era saw the widespread emergence of a class of salaried executives
and administrators who served the new, large-scale enterprises being created.
New managerial jobs lent themselves to salaried employment, in part because the
effort and output of "office work" were hard to measure hourly or piecewise, and in
part because they did not necessarily draw remuneration from share ownership.[13]
As Japan rapidly industrialized in the 20th century, the idea of office work was novel
enough that a new Japanese word (salaryman) was coined to describe those who
performed it, as well as referencing their remuneration.[13]
20th century
In the 20th century, the rise of the service economy made salaried employment even
more common in developed countries, where the relative share of industrial
production jobs declined, and the share of executive, administrative, computer,
marketing, and creative jobs—all of which tended to be salaried—increased.[13]
Salary and other forms of payment today

8
Today, the concept of a salary continues to evolve as part of a system of the total
compensation that employers offer to employees. Salary (also now known as fixed
pay) is coming to be seen as part of a "total rewards" system which includes bonuses,
incentive pay, commissions, benefits and perquisites (or perks), and various other
tools which help employers link rewards to an employee's measured performance.[13]
Compensation has evolved considerably. Consider the change from the days of and
before the industrial evolution, when a job was held for a lifetime, to the fact that,
from 1978 to 2008, individuals who aged from 18 to 44, held an average number of
11 jobs.[14] Compensation has evolved gradually moving away from fixed short-term
immediate compensation towards fixed + variable outcomes-based
compensation.[citation needed] An increase in knowledge-based work has also led to
pursuit of partner (as opposed to employee) like engagement.
By country
Botswana
In Botswana, salaries are almost entirely paid on a monthly basis with pay dates
falling on different dates of the second half of the month. Pay day usually ranges from
the 15th of the month to the last day. The date of disbursement of the salary is usually
determined by the company and in some cases in conjunction with the recognized
Workers Union.
The Botswana Employment Act Cap 47:01 Chapter VII regulates the aspect of
protection of wages in the contracts of employment. The minimum and maximum
wage payment period with the exception of casual employees should not be less than
one week or more than a month, and where not expressly stipulated a month is the
default wage period per section 75 of the Act payable before the third working day
after the wage period. The wages are to be paid during working hours at the place of
employment, or in any other way, such as through a bank account with the consent of
the employee. Salaries should be made in legal tender, however, part payment in kind
is not prohibited provided it is appropriate for the personal use and benefit of
employee and his family, and the value attributable to such payment in kind is fair and
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reasonable. The payment in kind should not exceed forty per cent of the total amount
paid out to the employee.
The minimum wage is set, adjusted and can even be abolished by the Minister on the
advice of the Minimum Wages Advisory Board for specified trade categories. The
stipulated categories include building, construction, hotel, catering, wholesale,
watchmen, the domestic service sector, the agricultural sector etc. The current
minimum wages set for these sectors are set out in the Subsidiary legislation in the
Act.
Women on maternity leave are entitled to 25% of their salaries as stipulated by the
Employment Act but the majority of the companies pay out at about 50% for the
period.[15]
DENMARK
By working for the Danish Government, it has been agreed under political
agreements, that the salary is dependent on the seniority, education, and of a
qualification allowance.
EUROPEAN UNION
According to European law, the movement of capital, services and (human) resources
is unlimited between member states. Salary determination, such as minimum wage, is
still the prerogative of each member state. Other social benefits, associated with
salaries are also determined on member-state level.[16]
INDIA
In India, salaries are generally paid on the last working day of the month
(Government, Public sector departments, Multi-national organisations as well as
majority of other private sector companies). According to the Payment of Wages Act,
if a company has less than 1,000 Employees, salary is paid by the Company on 7th of

10
every month. If a company has more than 1,000 Employees, salary is paid by the 10th
of every month.[17]
Minimum wages in India are governed by the Minimum Wages Act, 1948.[18]
Employees in India are notified of their salary being increased through a hard copy
letter given to them.[19]
ITALY
In Italy, the Constitution guarantees a minimum wage, as stated in Article 36,

Paragraph 1[20]
"Workers have the right to remuneration commensurate to the quantity and quality of
their work and in any case such as to ensure them and their families a free and
dignified existence."
This constitutional guarantee is implemented not through a specific legislation, but

rather through collective bargaining which sets minimum wage standards in a sector
by sector basis. Collective bargaining is protected by trade unions, which have
constitutional rights such as legal personality. The Constitution also guarantees equal
pay for women, as stated in Article 37, Paragraph 1[20]
"Working women are entitled to equal rights and, for comparable jobs, equal pay as
men."

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2. RESERCH AND METHODOLOGY

2.1 Objectives of the Study
The study was conducted with the following objectives:
1. To review the tax reforms being introduced by the Government in
respect of Income Tax Laws and ascertain its impact on the salaried
class.
2. To assess the efficiency of the administrative machinery for collection
of income tax and management of taxation matters as per the Income
Tax Act.
3. To understand and evaluate the tax planning measures being adopted by
the salaried class of the State.
4. To assess whether there is significant differences in the tax planning
measures adopted by different segments of the salaried class of the
State, based on level of income and type of organisation.
5. To ascertain the level of awareness of the salaried class on various tax
planning measures available under the Income Tax Act.
6. To analyse the impact of tax planning on savings habits and investment
pattern of the assessees belonging to the salaried class.
2.2 Scope of the Study

Taxation is considered as a complex matter affecting financial planning
of each individual income tax assessees. The scope of the present study is
limited to the tax planning measures adopted by the salaried income tax
assessees of the State. The study also evaluates the extent of awareness of
employees on tax laws and tax planning measures. The savings habits,
investment pattern, repayment of liabilities, tax planning measures adopted for
the period under study and the level of awareness of employees on tax laws and
tax planning measures were studied and evaluated.

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3. REVIEW OF LITERATURE
Boothalingam (1968) was appointed by the Government of India to examine the
structure of direct and indirect taxes in India. He recommended to abolish the
classification of income under various heads for determination of total income and to
allow setting off losses against any kind of income for improvement in income tax
structure. He highlighted that arrears of salary received when spread over a number of
past years, resulted in reopening of many assessments. Thus, he recommended
spreading the arrears of salary received over the future years rather than past years.
He suggested for stablisation in tax rate structure over the years, elimination of
surcharge and raising the exemption limit to Rs. 7500 for individuals and Rs. 10000
for HUF and discontinuation of personal allowances. He was of the opinion that
number 53 of Public Relation Officers should be increased for the convenience of the
taxpayers. Singh (1971) examined depreciation provisions under the Income Tax
Direct Tax Laws Committee (1978) was appointed by the Government

of India on June 25, 1977 under the chairmanship of N.A. Palkhiwala. Later on
C.C. Choksi took over the Chairmanship as Palkhiwala had to leave. The
committee (also known as Choksi Committee) was directed to recommend
measures for simplifying and rationalising the direct tax laws and improvement
in administration. Committee observed that frequent amendments in tax laws led
to uncertainty and confusion among tax payers and tax collectors. The
committee made following suggestion in its final report:
The various provisions relating to computation of income under the
head salary and deductions should be grouped together in the sections
dealing with computation of income under the head salary.

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Lall (1982)in his study analysed the impact of direct taxes on individual and business
income. The study of average income tax rates for assessees in different income
brackets from 1974-75 to 1978-79 revealed that average tax rates increased
progressively with the increase in income bracket. But average tax rate was
substantially lower than marginal tax rate applicable to that income bracket and trend
showed a downward movement. The researcher suggested that statutory tax rates
should not be reduced further for giving relief to assessees in the lower income
brackets rather it should be done by raising the level of deductions, exemptions and
rebates. The study also showed that annual average tax rate for five year period
(1974-75 to 1978-79) for central government employees, state government employees
and for non government employees was 7.8 per cent, 9 per cent and 11.8 per cent
respectively. The reasons identified for such differences were the composition of
salary income and discriminatory treatment of house rent allowance. The author also
opined that saving schemes and concessions available under income tax law might not
64 increase total level of savings in the economy but rather reallocated of the existing
level of savings. As a result of it the funds would flow from private sector to public
sector. He opined that a thorough reform of corporate and personal income tax system
should be undertaken.
Economic Administrative Reforms Commission (1983) was constituted
by Government of India to review income tax law, procedure and organization of
the income tax department in 1981 under the chairmanship of L. K. Jha. Some
important recommendations made by the commission were as follows:
The employers should be permitted to deduct from the salary payable,
tax on the employees incomes from sources like house property, interest
on deposits etc., if the employees made a specific request to the
employer and furnished necessary particulars.

14
Shome, Aggarwal and Singh (1996) studied the system of Tax

Deduction at Source (TDS) on income from salary, securities, lottery and
payment to contractors in India. The authors opined that TDS was an effective
instrument for quick and smooth collection of taxes. The study showed that
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TDS as a percentage of net collection of income tax increased from 26.45 per
cent in 1980-81 to 44.74 per cent in 1989-90 and then declined to 37.15 per cent
in 1994-95. The ratio of refund varied between 11 to 22 per cent of the gross
income tax collection. In the end, the researchers suggested that the scheme of
TDS should be extended to cover activities where black money had been
invested like the transfer of immoveable property and transaction of shares.

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4DATA ANALYSIS
Income under the head Salaries
4.1 INTRODUCTION:
Income from salary is the income or remuneration received by an
individual for services he is rendering or a contract undertaken by him. This clause
essentially assimilates the remuneration received by a person for the services provided
by him under the contract of employment.
This amount of remuneration will be considered as income for the purposes of Income
Tax Act only if there is an Employer and employee relationship between the person
who is making the payment and the person who is receiving the payment.
Employer and Employee Relationship –Any payment that is received by a person

will be treated as Income under Income Tax Act if there exist an Employer and
employee relationship between the payer and payee. For the purpose of qualifying
income as income from salary, their relationship should be that of a master and
servant. Where a master is a person who directs his employee that what is to be done
and how it is to be done and servant is the person who is liable to conduct that work in
the manner told by his employer.
4.2Meaning of salary:
Salary is defined to include:
Wages;
Pension;
Annuity;
Gratuity;
Advance Salary paid;
Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages;
Annual accretion to the balance of Recognized Provident Fund;
Leave Encashment;
Transferred balance in Recognized Provident Fund;

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Contribution by Central Govt. or any other employer to Employees Pension A/c as

referred in Sec. 80CCD
4.3Definition of salary [U/s 12]:

Any salary received by an employee in a tax year, other than exempt salary under the
Income Tax Ordinance 2001, shall be chargeable to tax in that year under the head
salary.
A person is salaried person where taxable salary exceeds 50% of taxable income from
all heads of income.
Salary means:
any amount received by an employee from any employment whether of
a revenue or capital nature:
"Employee" means any individual engaged in employment [including an employed
director (Rule 6)]. [U/s 2(20)]
"Employer" means any person who engages and remunerates an employee. [U/s
2(21)]“Employment” includes: [U/s 2(22)].
(1) A directorship or any other office involved in the management of a company;
(2) A position entitling the holder to a fixed or ascertainable remuneration; or
(3)The Holding or acting in any public office.
4.4Characteristics of Salary
1. The relationship of payer and payee must be of employer and employee

for an income to be categorized as salary income. For example: Salary
income of a Member of Parliament cannot be specified as salary, since it is
received from Government of India which is not his employer.

17
2. The Act makes no distinction between salary and wages, though generally
salary is paid for non-manual work and wages are paid for manual work.
3. Salary received from employer, whether one or more than one is included
in this head.
4. Salary is taxable either on due basis or receipt basis which ever maturesearlier:
I) Due basis – when it is earned even if it is not received in the previous year.
ii) Receipt basis – when it is received even if it is not earned in the previousyear.
iii) Arrears of salary- which were not due and received earlier are taxablewhen due or
received, whichever is earlier.
5. Compulsory deduction from salary such as employees’ contribution toprovident

fund, deduction on account of medical scheme or staff welfarescheme etc. is examples
of instances of application of income. In thesecases, for computing total income, these
deductions have to be addedback.
Example:SammiKhurana is an employee of a company. He comes to office only 5

hours in a day. He received Rs.20000 salary from the company. Explain with reasons
that he is considered as an employee of a company or not.
Solution: Although he is a part time employee of a company, however the amount so

received shall be treated as salary income for the year.
4.5Gross Salary:
Gross salary has many components to it and is the yearly or monthly salary before
deductions have been made. There are differences between gross and net salary as
well as basic and gross salary.
Employees who are paid for their services are generally offered gross salary as their
CTC, which is short form for cost to company. Cost to company is a term that implies
the expense that the company will have to incur on an employee for a specific year.
However, cost to company is an amount that is never equal to the amount of money
you get to take home.

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What is Meant by Gross Salary?

Gross salary is the monthly or yearly salary of an individual before any deductions are
made from it. Components such as basic salary, house rent allowance, provident fund,
leave travel allowance, medical allowance, Professional Tax etc. are some of the most
prominent components of gross salary.
4.6Components that Form a Part of Gross Salary:

Listed below are the various components that together make up the gross salary.
Basic salary, pension component, gratuity component, salary arrears, fee or

remuneration, payment for overtime, ex-gratia and performance-related cash awards
Allowance such as house rent allowance, medical allowance, leave travel allowance,
dearness allowance and other such special allowances
Perquisites like rent for accommodation, electricity, water and fuel charges
Pension received from former employer
4.7Components that do not Form Part of Gross Salary:

Following are the few things that do not form part of gross salary paid by an employer
to an employee.
Reimbursement for medical expenses
Leave Travel Concession
Leave encashment rolled out at the time of retirement of employee
Free meals or snacks or refreshment provided by the employer to its employees,

during office hours
4.8Difference between Gross Salary and Net Salary?

The difference between gross salary and net salary is that while gross salary is your
salary before any deductions are made from the salary, net salary is the salary an
employee takes home after all deductions have been made.

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Gross Salary Under Section 17(1)

According to Section 17(1) salary includes the following amounts received by an
employee from his employer, during the previous year
Wages;
Any annuity or pension; (Family pension received by heirs of an employee is taxable

under income from other sources);
Any gratuity;
Any fees, commission, perquisites or profits in lieu of or in addition to any salary or

wages;
Any advance of salary;
Any payment received by an employee in respect of any period of leave not availed of
by him; (Leave encasement or salary in lieu of leave);
The annual accretion to the balance at the cr. of an employee participating in a

recognised provident fund, to the extent to which it is chargeable to tax under Rule 6
of part A of the Fourth Schedule; and
The aggregate of all sums that are comprised in the transferred balance as referred to
in sub-rule (2) of Rule 1] of Part A of the Fourth Schedule, of an employee
participating in a recognised provident fund, to the extent to which it is chargeable to
tax, under sub-rule (4) there, i.e., taxable portion of transferred balance from
unrecognised provident fund to recognised provident fund.
The contribution made by the Central Government or any other employer in the
previous year, to the account of an employee under a pension scheme referred to in
Section 8OCCD.
Taxation Process of Gross Salary:
For calculation of Income Tax, gross salary minus the eligible deductions are considered. For
example, you will have to deduct HRA exemption, any home loan EMI, investments under
section 80C and 80D and similar such things for calculation of taxable income.
This taxation process is different for self-employed and salaried individuals.

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4.9 TAXABILITY OF VARIOUS COMPONENTS OF SALARY:

ALLOWANCE:
MEANING:
Allowance is 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.
(A). FULLY TAXABLE ALLOWANCE:
(1). Dearness Allowance:

(A). MEANING: dearness allowance is defined as the cost of living adjustment
allowance which the government offers to public sector employees, as well as pensioners of
the same. Dearness Allowance is a component of the salary which is applicable to employees
in India as well as Bangladesh.
Basically, Dearness Allowance is understood as a component of salary which is a fixed

percentage of an employee’s basic salary, which aims to hedge the impact of inflation. Since,
this allowance is related to the cost of living, the Dearness Allowance component differs for
various employees based on their location. This implies that Dearness Allowance is different
for employees working in the urban sector, semi-urban sector and the rural sector.
(B). INCOME TAX AND EXEMTION LIMIT OF DEARNESS

ALLOWANCE:
According to the Assessment Year 2017-18, Dearness Allowance is fully taxable for
individuals who are salaried employees. In case the said employees are offered rent free
accommodation by the employer, which is unfurnished, wherein all prerequisites are met,
dearness allowance becomes part of the salary to the extent wherein it forms a component of
the retirement benefit salary.

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(C).CALCULATION OF DEARNESS ALLOWANCE:
For Central Government employees:
Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 12
months- (115.76/115.76*100)
For Central public sector employees after 1/1/2007:
Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 3
months-
(126.33/126.33*100)
(D). HIKE IN DEARNESS ALLOWANCE UNDER RECENT BUDGET 2018:

It was quite a relief to most central government employees when the hike in the
Dearness Allowance was announced. The Union Cabinet raised the Dearness
Allowance of government employees by 2% recently. This move was spearheaded by
Indian Prime Minister, Mr. Narendra Modi, and is aimed at benefiting almost50 lakh
Central Government employees and around55 lakh pensioners. In an effort to reduce
the inflation effects on the salaries of these employees, dearness allowance hike is
generally offered to pensioners and staffers.
2018 has been the year of drastic changes on the taxation ecosystem. The new budget
brought a number of new advancements and developments. The Dearness Allowance
was increased to 7% from an earlier rate of 5%, for almost more than11 million
government employees.
As per the proposed changes, this increase in DA in all probability, will work in the
favour of more than48.41 lakh central employees and61.17 lakh pensioners and
staffers.
(2).Entertainment Allowance:
This deduction is allowed only to a Government employee. Non-Government
employees shall not be eligible for any deduction on account of any entertainment
allowance received by them.
In case of entertainment allowance, the assesses is not entitled to any exemption but
he is entitled to a deduction under section 16(ii) from gross salary. Therefore, the

22
entire entertainment allowance received by any employee is added in computation of

the gross salary. The Government employee is, then, entitled to deduction from gross
salary under section 16(ii) on account of such entertainment allowance to the extent of
minimum of the following3limits.
Actual entertainment allowance received during the previous year.
20% of his salary exclusive of any allowance, benefit or other perquisite.
5,000
(3).Overtime Allowance: Employers may provide an overtime allowance to

employees working over and above the regular work hours. This is called overtime
and any allowance received for this is fully taxable.
(4).City Compensatory Allowance: City Compensatory Allowance is paid to

employees in an urban centre which may be highly expensive and to cope with the
inflated living costs in the cities. This allowance is fully taxable.
(5).Interim Allowance: When an employer gives any Interim Allowance in lieu

of final allowance, this becomes fully taxable.
(6). Project Allowance: When an employer provides an allowance to employees

to meet project expenses, this is also fully taxable. Hu
(7). Tiffin/Meals Allowance: Sometimes employers may provide Tiffin/Meals

Allowance to the employees. This is fully taxable.
(8). Cash Allowance: When the employer provides a cash allowance like
marriage allowance, bereavement allowance or holiday allowance, it becomes fully
taxable.
(9). Non-Practicing Allowance: When physicians are attached to Clinical

Centre’s of the various Laboratories/Institutes, any non-practicing allowance paid to
them become fully taxable

23
(10). Warden Allowance: When an employer pays an allowance to an employee

working as a Warden i.e. Keeper in an educational Institute, the allowance received is
fully taxable.
(11). Servant Allowance: When an employer pays an employee to engage

services of a servant, such an allowance is taxable.
(B). PARTIALLYEXEMPTED ALLOWANCES:

This category includes allowances which are exempt up to certain limit specified in
Income Tax Rules. For certain allowances, exemption is dependent on amount of
allowance spent for the purpose for which it was received and for other allowances,
there is a fixed limit of exemption. They are as follows:
HRA (House Rent Allowance): House Rent Allowance, or commonly known

as HRA, is an amount which is paid by employers to employees as a part of their
salaries. This is basically done as it helps provide employees with tax benefits towards
the payment for accommodations every year. The decision of how much HRA needs
to be paid to the employee is made by the employer on the basis of a number of
different criteria such as the salary and the city of residence.
Regulated by the provisions of Section 10(13A) of the IT Act, the house rent
allowance serves to be quite beneficial to salaried employees in India.
As per law, only salaried employees can claim HRA and self-employed individuals
are exempt from doing the same. HRA, as an exemption is provided, only if the
employee is living in rented accommodations. However, also in case the employee
lives in his or her own house and does not pay any rent, he or she cannot claim HRA
to save on taxes.
(a). Basis on which HRA is decided:

Primarily, HRA is decided based on the salary. However, there are some other factors
that also affect HRA, such as the city in which the employee resides. In case the
individual resides in a metro city, then he/she is entitled to an HRA equal to 50% of
the salary. For cities other than a metro, the entitlement is 40% of the salary.
24
In order to calculate the HRA, the salary is defined as the sum of the basic salary,
dearness allowances and any other commissions. If an employee does not receive a
commission or a dearness allowance, then the HRA will be around 40% - 50% of
his/her basic salary.
The actual HRA offered, in all probability, will be the lowest of the following three
provisions:
The actual rent that is paid should be less than 10% of the basic salary.
In case you’re staying in a metro, 50% of the basic salary and 40% if you live in a
non-metro city.
The actual amount received as the HRA from the employer.
(b)How is HRA Calculated?

HRA or The House Rent Allowance serves as a crucial component of an individual's
salary. It defines the total amount allotted by the employer towards the employee's
accommodation as rent. The amount allotted for HRA proves to be beneficial for an
employee as it is calculated for tax deductions for a particular financial year. HRA
also helps in reducing the taxable income that you are liable to pay. The tax benefits
associated with HRA are only applicable for those salaried individuals who stay in a
rental accommodation. If an employee stays in his or her own house, he or she is not
eligible to claim the amount for tax deductions.
Calculation of HRA is based on a number of factors, such as the entitlement to 50%

of the basic salary, if the employee is residing in a metro city and 40% in case, he/she
stays in any of the other cities. The calculation of HRA for tax benefit is considered
from any of the following three listed provisions:
non-metro city.
The actual amount allotted by the employer as the HRA.
The least of the aforementioned amount will be considered for tax deduction from
HRA
Calculation of HRA is based on a number of factors, such as the entitlement to 50%

of the basic salary, if the employee is residing in a metro city and 40% in case, he/she

25
stays in any of the other cities. The calculation of HRA for tax benefit is considered
from any of the following three listed provisions:
non-metro city. The actual amount allotted by the employer as the HRA.
Example: In order to understand how to calculate HRA for an employee, let us

consider an example of Mr. RAHUL GANDHI. RAHUL resides in New Delhi in a
rented accommodation, paying a rent of Rs. 10,000 per month. Here’s what his
payslip looks like-
EMPLOYEE NUMBER- RAHUL

1008 GANDHI AMOUNTS
Basic 30,000 PF 2000
HRA 13,000 Professional Tax 200
Conveyance 3,000
Special Allowance 2,000
Medical expenses 1,250

26
The least of the aforementioned amount will be considered for tax deduction from
HRA
For the purpose of calculating Rahul Gandhi HRA that is exempt from Income Tax,
we have the following information:
His basic salary is Rs. 30,000 per month, which will be considered since there is no
commission or dearness allowance
HRA provided by company is Rs. 13,000 per month
10% of the annual basic salary comes to Rs. 36,000
Now, let’s calculate the same in the following three scenarios:
Amount received as HRA from employer = Rs. 13,000 X 12 (months) = Rs. 1,56,000
Or, Actual rent paid less 10% of basic = (Rs. 10,000 X 12) – Rs. 36,000 = Rs. 84,000
50% of basic salary since he lives in a metro = Rs. 1,80,000
Hence, based on the above calculation, it is evident that the HRA amount, which will
be exempt from tax for M. Rahul, will be Rs. 84,000 as that comes to be the least of
the three amounts in the scenarios stated above.
(c). Claim Rules for HRA:The rules that are applicable for HRA claims are
listed as follows-
Your allotted HRA cannot exceed more than 50% of your basic salary.
As a salaried employee, you cannot claim for the full rental amount you are paying.
Your exemption will be based on the least of the below mentioned options:
The actual amount allotted by the employer as the HRA.
Actual rent paid less 10% of the basic salary.
50% of the basic salary, if the employee is staying in a metro city (40% for a non-
metro city).
You can also avail tax benefits of HRA along with a home loan.
In case you stay with your parents, you are eligible to pay rent to your parents and
collect a receipt for HRA claim. However, similar rules don't allow you to pay rent to
your spouse and claim a tax exemption.

27
If the annual rent of your accommodation exceeds Rs.1,00,000, then presenting the
landlord's PAN card is mandatory. Also, in case the landlord does not have a PAN
card, he/she can provide a self-declaration.
House Rent Allowance (HRA) Tax Benefits – Lose without

Landlord’s Pan
The Circular (08/2013) states that “an employee claiming exemption from tax with
respect to House Rent Allowance received is now required to report the PAN of the
landlord to the employer, if the rent paid by the employee to the landlord exceeds Rs.
1 Lakh per annum, along with the rent receipt. “In simple words, if the annual rent is
above Rs. 1 Lakh, then the employee must report the PAN details of the landlord to
the employer. If the landlord is not having a PAN then the landlord must submit a
declaration to this effect along with his name and address.
House Rent Allowance (HRA) – Factors Deciding Exemption
From the above rules, it is clear that there are 4 factors which decide your eligibility
for House Rent Allowance (HRA) exemption. They are:
Actual HRA received by you
Actual Rent paid by you
Your city of residence
Your salary (Basic Pay & DA)
The step is to plug 2 loopholes in the system:
To stop the abuse of House Rent Allowance (HRA) claims
Furnish the correct rent income information by the landlord
House rent accommodation and rent-free accommodation are different things. Rent
free accommodation is residential space given by employer to employee without or
with partial
rent. Rent free accommodation is perquisites u/s. Rent free accommodation is non-
monetary benefit and HRA is monetary benefit. Both are covered under salary head.
Self-employed person cannot avail HRA exemption benefit. But he can avail
deduction u/s 80GG for rent paid during the year if he has not owned house.

28
You can pay rent to your parents and claim it for HRA exemption. The parents should
show the rent amount as income for income tax purpose. But you cannot claim HRA
for rent paid to spouse.
You can avail home loan interest and principal exemption simultaneously with HRA
exemption
(3) Special Allowances to meet personal expenses: There are certain allowances
given to the employees for specific personal purposes and the amount of exemption is
fixed i.e. not dependent on actual expenditure incurred in this regard. These
allowances include
Allowance name Exemption limit

Children education allowance (maximum 2 Rs. 100/- p.m. Per child
children)
Children hostel allowance (maximum 2 children) Rs. 300/- p.m. Per child
Transport allowance Rs. 800/- p.m.

Or Rs. 1600/- p.m. (for
handicapped)
Any allowance granted to an employee working in Rs. 10,000/- p.m.
any transport system Or
70% of allowance
(whichever is lower)
Tribal area allowance Rs. 200/- p.m.
Underground allowance Rs. 800/- p.m.
Compensatory field area allowance Rs. 2,600/- p.m.
Compensatory modified field area allowance Rs. 1,000/- p.m.
Counter-insurgency allowance to members of Rs. 3,900/-p.m.

armed forces

29
Table:
For the purpose of easy comparison, we can put the allowances and their taxability in
the following table:
Taxable allowances Partly-taxable allowances Tax-exempt allowances
Dearness allowance
Entertainment allowance
Overtime allowance
City compensatory
allowance Govt. employees posted abroad
HRA
Interim allowance Sumptuary allowance
Fixed medical allowance
Project allowance Allowance for UNO employees
Special allowance
Tiffin/meals allowance City compensatory allowance
Cash allowance
Non-practicing allowance
Warden allowance
Servant allowance

30
(C). FULLY EXEMPT ALLOWANCES:

The following allowances prescribed by the Central Board of Direct Taxes under Rule
2BB of the Income-tax rules are fully exempt to the extent actually incurred by the
employee and any saving out of such allowance will be fully taxable
Some of the allowances, usually paid to Government servants, judges and employees
of UNO are not taxable. These are:
Allowances paid to Govt. servants abroad: When servants of Government of India

are paid an allowance while serving abroad, such income is fully exempt from taxes.
Sumptuary allowances: Sumptuary allowances paid to judges of HC and SC is not

taxed.
Allowance paid by UNO: Allowances received by employees of UNO are fully

exempt from tax.
Compensatory allowance paid to judges: When a judge receives compensatory

allowance, it is not taxable.
Illustration (based on different allowances received by employee)
From the following particulars, compute gross salary of Mr X for the assessment year
2006-07. He is employed in textile industry in Mumbai at a monthly salary of
Rs.4000. He is entitled to commission of 1% on sales achieved by him, which were
Rs.10 lakh for the year.
In addition, he received the following allowances from the employer during the
previous year:
1. Dearness Allowance Rs.2000 per month which is granted under terms of

employment and counted for retirement benefits.
2. Bonus Rs.3200
3. House Rent Allowance Rs.1000 per month (Rent paid for house in Mumbai
Rs.1200 per month)
4. Entertainment Allowance Rs.1000 per month

31
5. Children Education Allowance Rs.500 per month
6. Transport Allowance Rs.1000 per month
7. Medical Allowance Rs.500 per month
8. Servant Allowance Rs.200 per month
9. City Compensatory Allowance Rs.300 per month
10. Research Allowance Rs.500 per month (amount spent on research Rs.3000)
Solution:
Computation of Income from Salary of Mr. X
for the Assessment Year 2006-07
Particular Rs.
Basic Salary 48,000
Dearness Allowance 24,000
Commission 10,000
Bonus 32,000
House Rent Allowance (Rs.1000 x 12 – Amount exempt Rs.6200) 5,800
Entertainment Allowance 12,000
Children Education Allowance (Rs.500 x 12 – Amount exempt Rs.100 3,600
x 2 x 12) 2,400
Transport Allowance (Rs.1000 x 12 – Amount exempt Rs.800 x 12) 6,000
Medical Allowance (fully taxable Servant Allowance (fully taxable) 2,400
City Compensatory Allowance (fully taxable) 3,600
Research Allowance (Rs.500 x 12 – Amount exempt Rs.3000) 3,000
Gross Salary 152,800
Amount of HRA exempt is least of 3 amounts
a) 50% of Salary (Basic Salary + DA granted under terms of employment +

Commission based on percentage of turnover – Rs.48,000 + Rs.24,000 + Rs.10,000 =
Rs.82,000) = Rs.41,000
32
b) Actual HRA received: Rs.1000 x 12 = Rs.12,000
c) Rent paid (Rs.1200 x 12) – 10% of Salary (Rs.82,000) Rs.14,400 – Rs.8,200 =

Rs.6,200
SECTION 17(2) – PERQUISITES UNDER THE INCOME TAX

ACT
Perquisites are nothing but the benefits that are enjoyed by or entitles to a person on
account of his position or job. This article deals with the taxability of additional
benefits provided by the employers to their employees as provided and regulated by
section 17(2) of the Income Tax Act, 1961.
MEANING OFPERQUISITE:
The term ‘perquisite’ indicates some extra benefit in addition to the normal salary
provided to the employees. These may be provided free of cost or at concessional
rates to the employees.
Some examples of perquisites are: rent-free accommodation, provision of a motor

car for personal use, use of health club, refreshment during office hours, etc.
The questions that arise from a tax point of view is
Whether such perks are taxable?
If yes, how do we value the benefit received?
Whether there are any exemptions available?
Let us discuss the features and taxability of these perquisites and how can it impact
your income tax return.
Definition:
Under the Act, the term ‘perquisite’ is defined by section 17(2) to include the
following:
(a) the value of rent-free accommodation provided to the assessee by his employer
[section
17(2)(I)];
(b) The value of any concession in the matter of rent respecting any accommodation

33
provided to the assessee by his employer [section 17(2)(ii)];
(I) Under section 17(2)(ii), the value of any concession in the matter of rent arising to
an employee in respect of any accommodation provided by his employer is
considered as "perquisite" chargeable to tax in the hands of the employee.
(ii) Rule 3(1) of the Income-tax Rules provides the basis of valuation of perquisites in
respect of accommodation provided to an employee, as under:
(a) 15% of salary in cities having population exceeding 25 lakhs
(b) 10% of salary in cities having population above 10 lakhs up to 25 lakhs
(c) 7.5% of salary in cities having population up to 10 lakhs.
(iii) In case of furnished accommodation provided by an employer, the value arrived

as
above was to be further increased by 10 per cent of the cost of furniture, where the
same is owned by the employer, or the actual hire charges paid by the employer in
case the furniture is hired.
(iv) This method of perquisite valuation resulted in genuine hardship to employees
availing facility of residential accommodation in remote areas, as the value of
perquisite was determined as a percentage of salary of the employee, irrespective
of the fair rental value of the property (which may be much lower than
15%/10%/7.5% of salary in such cases).
(v) Rule 3(1) was challenged as ultra vires before the Supreme Court in the case of
Arun Kumar v. UofL (2006) 286 ITR 89. The Apex court, while holding that the
provisions of Rule 3(1) were constitutionally valid, observed that the same would be
applicable only if 'concession in the matter of rent' with respect to the
accommodation provided by an employer accrues to the employee under the
substantive provisions of section 17(2)(ii). The Assessing Officer, before applying
Rule 3(1), was required to establish that there was 'concession in the matter of rent'
provided to the employee.
(vi) Further, as per the Apex court, the difference between the values as per Rule 3(1)

34
and the rent recovered from the employee, could not per se be considered as
‘concession in the matter of rent’ provided to the employee.
(1) (2)
Type of accommodation Deemed concession in the matter of rent
Accommodation owned by the employer
In cities having a population exceeding 25 lakhs 15% of salary minus rent recoverable from
employees
In cities having a population exceeding 10 lakhs 10% of salary minus rent recoverable from the
but not exceeding 25 lakhs employee.
In other cities 7½% of salary minus rent recoverable
from employee
Accommodation taken on lease by Rent paid by the employer or 15% of salary,
the employer whichever is lower, minus rent recoverable
from the employee.
(viii) This deeming provision is applicable to employees other than Government

employees. In case of furnished accommodation provided to such employees, the
excess of hire charges paid or 10% p.a. of cost of furniture, as the case may be, over
and above the charges paid or payable by the employee would be added to the value
determined in column (2) above for determining whether there is a concession in the
matter of rent.
Note – Once there is a deemed concession, the provisions of Rule 3(1) would be
applicable in computing the taxable perquisite.
(ix) “Salary” includes pay, allowances, 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. However, it does not include the following, namely–
(1) dearness allowance or dearness pays unless it enters into the computation of
superannuation or retirement benefits of the employee concerned;
(2) employer’s contribution to the provident fund account of the employee;
(3) allowances which are exempted from the payment of tax;
(4) value of the perquisites specified in section 17(2);
(5) any payment or expenditure specifically excluded under the proviso to section

35
17(2) i.e., medical expenditure/payment of medical insurance premium
specified therein.
(x) In case of Government employees, the excess of licence fees determined by the
employer as increased by the value of furniture and fixture over and above the rent
recovered/recoverable from the employee and the charges paid or payable for
furniture by the employee would be deemed to be the concession in the matter of rent.
(c) The value of any benefit or amenity granted or provided free of cost or at
concessional rate in any of the following cases (i.e. in case of specified employees):
(I) by a company to an employee in which he is a director;
(ii) by a company to an employee being a person who has substantial interest in the
Company (i.e. 20% or more of the voting rights of the company);
(iii)By any employer (including a company) to an employee to whom the provisions

of
(I) & (ii) do not apply and whose income under the head ‘salaries’ (whether due
From, or paid or allowed by, one or more employers) exclusive of the value of all
Benefits or amenities not provided for by way of monetary benefits exceeds
` 50,000 [Section 17(2) (iii)];
(d) Any sum paid by the employer in respect of any obligation which, but for such
payment,
Would have been payable by the assessee [Section 17(2) (IV)];
(e) Any sum payable by the employer whether directly or through a fund, other than a
Recognised provident fund or approved superannuation fund or deposit-linked

insurance
Fund to affect an assurance on the life of the assessee or to affect a contract for an
Annuity [Section 17(2) (v)];
(f)The value of any specified security or sweat equity shares allotted or transferred,
directly
Or indirectly, by the employer or former employer, free of cost or at concessional rate

to

36
The assessee [Section 17(2) (VI)];
Specified security means “securities” as defined in section 2(h) of the Securities
Contracts (Regulation) Act, 1956. It also includes the securities offered under
employees
Stock option plan or scheme. Sweat equity shares means equity shares issued by a
Company to its employees or directors at a discount or for consideration other than

cash
For providing know-how or making available rights in the nature of intellectual

property
Rights or value additions, by whatever name called.
The value of specified security or sweat equity shares shall be the fair market value
of
Such security or shares on the date on which the option is exercised by the assesse, as
Reduced by any amount actually paid by, or recovered from, the assessee in respect of
Such security or shares. The fair market value means the value determined in
Accordance with the method as may be prescribed by the CBDT. “Option” means a
Right but not an obligation granted to an employee to apply for the specified security
or
Sweat equity shares at a pre-determined price.
(g)The amount of any contribution to an approved superannuation fund by the

employer in
Respect of the assessee, to the extent it exceeds ` 1 lakh [Section 17(2) (vii)];
(h)The value of any other fringe benefit or amenity as may be prescribed by the
CBDT
[Section 17(2) (viii)].
It can be noted that the aforesaid definition of perquisite is an inclusive one. More
terms can

37
Be added in.
Monetary perquisite:
Employer either reimburses the expenses incurred by the employee for such facilities
or pays on behalf of the employee. Ex: personal gas bills of the employee are in the
name of employee and the employer reimburses the amount of such gas bills to him or
pays on his behalf to the gas agency, it is in monetary terms and taxable in case of all
employees; on the other hand, if such bills are in the name of employer, it will be
perquisite in case of specified employee only.
Non-monetary perquisite:
Payments which can be called non-monetary payments are car facility, benefit on
account of interest-free loans, rent-free accommodation, furniture provided to
employees etc.
Features of a Perquisite
It may be provided in cash or in kind
Reimbursement of expenses incurred during performance of official duty is not a

perquisite
Perquisite can be made taxable only if it has a legal origin. An undue advantage taken
by the employee without the employer’s sanction cannot be considered as a perquisite
CATEGORIES OF A PERQUISITE
The perquisites received by an employee from his employer can be classified into 2
categories based on taxability:
(1) Perquisites taxable in the case of all employees:

The following perquisites are chargeable to tax in all cases.

38
1) Value of rent-free accommodation provided to the assessee by his employer

[Section
2) 17(2) (I)].
3) Exception: Rent-free official residence provided to a Judge of a High Court or
to a Judge
4) Of the Supreme Court is not taxable. Similarly, rent-free furnished house
provided to an
5) Officer of Parliament is not taxable. [For valuation, refer to para 4.20]
6) Value of concession in rent in respect of accommodation provided to the
assessee by his
7) Employer [Section 17(2) (ii)].
8) Amount paid by an employer in respect of any obligation which otherwise
would have
9) Been payable by the employee [Section 17(2) (IV)]. For example, if a
domestic servant is
10) engaged by an employee and the employer reimburses the salary paid to the
servant, it
11) becomes an obligation which the employee would have discharged even if the
employer
12) Did not reimburse the same. This perquisite will be covered by section
17(2)(iv) and will
13) Be taxable in the hands of all employees.
14) Amount payable by an employer directly or indirectly to affect an assurance
on the life of
15) the assessee or to affect a contract for an annuity, other than payment made to
RPF or
16) approved superannuation fund or deposit-linked insurance fund established
under the
17) Coal Mines Provident Fund or Employees’ Provident Fund Act. However,
there are
18) schemes like group annuity scheme, employees state insurance scheme and
fidelity

39
19) insurance scheme, under which insurance premium is paid by employer on

behalf of the
20) Employees. Such payments are not regarded as perquisite in view of the fact
that the
21) Employees have only an expectancy of the benefit in such schemes.
22) the value of any specified security or sweat equity shares allotted or
transferred, directly
23) or indirectly, by the employer or former employer, free of cost or at
concessional rate to
24) The assessee.
25) the amount of any contribution to an approved superannuation fund by the
employer in
26) Respect of the assessee, to the extent it exceeds ` 1 lakh.
27) The value of any other fringe benefit or amenity as may be prescribed by the
CBDT.
(2)Perquisites exempt from tax in all cases:

The following perquisites are exempt from tax in all cases
1) Telephone provided by an employer to an employee at his residence;

2) Goods sold by an employer to his employees at concessional rates;
3) Transport facility provided by an employer engaged in the business of
carrying of
4) passengers or goods to his employees either free of charge or at concessional
rate;
5) Privilege passes and privilege ticket orders granted by Indian Railways to its
employees;
6) Perquisites allowed outside India by the Government to a citizen of India for
rendering
7) services outside India;
8) Sum payable by an employer to an RPF or an approved superannuation fund
or deposit-
40
9) linked insurance fund established under the Coal Mines Provident Fund or the
10) Employees’ Provident Fund Act;
11) Employer’s contribution to staff group insurance scheme;
12) Leave travel concession;
13) Payment of annual premium by employer on personal accident policy effected
by him on
14) the life of the employee;
15) Refreshment provided to all employees during working hours in office
premises;
16) Subsidized lunch or dinner provided to an employee;
17) Recreational facilities, including club facilities, extended to employees in
general i.e., not
18) restricted to a few select employees;
19) Amount spent by the employer on training of employees or amount paid for
refresher
20) management course including expenses on boarding and lodging;
21) Medical facilities subject to certain prescribed limits; [Refer to point 10 of
para 4.20]
22) Rent-free official residence provided to a Judge of a High Court or the
Supreme Court;
23) Rent-free furnished residence including maintenance provided to an Officer
of
24) Parliament, Union Minister and a Leader of Opposition in Parliament;
25) Conveyance facility provided to High Court Judges under section 22B of the
High Court
26) Judges (Conditions of Service) Act, 1954 and Supreme Court Judges under
section 23A
27) Of the Supreme Court Judges (Conditions of Service) Act, 1958.
(3) Perquisites taxable only in the hands of specified employees

[Section 17(2) (iii)]:
The value of any benefit or amenity granted or provided free of cost or at
concessional rate which have
41
Not been included in 1 & 2 above will be taxable in the hands of specified employees:
Specified employees are:
(I) Director Employee: An employee of a company who is also a director is a

specified
Employee. It is immaterial whether he is a full-time director or part-time director. It

also does not
Matter whether he is a nominee of the management, workers, financial institutions or

the
Government. It is also not material whether or not he is a director throughout the

previous year.
(ii) An employee who has substantial interest in the company: An employee of a
Company who has substantial interest in that company is a specified employee. A

person has
A substantial interest in a company if he is a beneficial owner of equity shares

carrying 20% or
Beneficial and legal ownership: In order to determine whether a person has a

substantial
Interest in a company, it is the beneficial ownership of equity shares carrying 20% or

more of
The voting power that is relevant rather than the legal ownership.
Example: A, Karta of a HUF, is a registered shareholder of Bright Ltd. The amount

for
Purchasing the shares is financed by the HUF. The dividend is also received by the
HUF.
Supposing further that A is the director in Bright Ltd., the question arises whether he
is a
Specified employee. In this case, he cannot be called a specified person since he has
no

42
Beneficial interest in the shares registered in his name. It is only for the purpose of
satisfying
The statutory requirements that the shares are registered in the name of A. All the
benefits
Arising from the shareholding goes to the HUF. Conversely, it may be noted that an
employee
Who is not a registered shareholder will be considered as a specified employee if he

has?
Beneficial interest in 20% or more of the equity shares in the company.
(iii) Employee drawing in excess of ` 50,000: An employee other than an employee
Described in (I) & (ii) above, whose income chargeable under the head ‘salaries’
exceeds
` 50,000 is a specified employee. The above salary is to be considered exclusive of the

value
Of all benefits or amenities not provided by way of monetary payments.
In other words, for computing the limit of ` 50,000, the following items have to be
excluded or
Deducted:
(a) All non-monetary benefits;
(b) Monetary benefits which are exempt under section 10. This is because the
exemptions
Provided under section 10 are excluded completely from salaries. For example, HRA
or
Education allowance or hostel allowance are not to be included in salary to the extent
to
Which they are exempt under section 10.
(c) Deduction for entertainment allowance [under section 16(ii)] and deduction
toward
Professionaltax [under section 16(iii)] is also to be excluded.
If an employee is employed with more than one employer, the aggregate of the salary

43
Received from all employers is to be taken into account in determining the above
ceiling limit of
` 50,000, i.e. Salary for this purpose
= Basic Salary + Dearness Allowance + Commission, whether payable monthly or

turnover
Based + Bonus + Fees + Any other taxable payment + any taxable allowances + any
Other monetary benefits – Deductions under section 16]
VALUATION OF PERQUISITES:
Now that we are clear on which perquisites are required to be taxed, the next question
that arises is how to calculate the value of the benefit received. Let us discuss the
valuation of some important perquisites as covered in most of the pay packages.
Valuation of Rent-Free Accommodation
The valuation of the benefit received in respect of rent-free accommodation can be

categorised as follows
Where the employer owns the accommodation provided

the value in respect of such an accommodation would depend upon the population of
the place where such accommodation is provided
Population in the place where the

Value of Perquisite to be taxed
accommodation is provided
Less than 10 Lakhs 7.5% of salary
10 to 25 Lakhs 10% of salary
More than 25 Lakhs 15% of salary

44
Salary would be calculated in respect of the period during which the said
accommodation was occupied by the employee during the previous year
Where the is taken on lease / rent by the employer

the value of perquisite in such a case would be lower of the two
Actual rent paid / payable by the employer or
15% of the salary
Note:
The above values are calculated in respect of unfurnished accommodation. However,

if a furnished accommodation has been provided, the value of the furniture would be
required to be added separately to the above-calculated values which can be
ascertained as follows:
If the furniture is owned by the employer – 10% of the cost of the furniture for each
year
If the furniture is hired from a third party – Actual hire charges payable for the same
Where the accommodation has been provided in a hotel

the value of perquisite in such a case would be lower of the two
Actual hotel charges paid / payable by the employer or
24% of the salary
Note:
Salary for the purpose of this section would mean Basic salary + Dearness allowance
(if terms of employment so provide) + All taxable cash components of salary like
bonus, commission, allowances, etc.
Valuation of the Motor Car for Personal Use
The valuation of benefit in respect of motor car provided can be categorised as

follows
Situation A: Employee’s Car and expense borne by the employer
Situation B: Employer’s Car and expense borne by the employer
Situation C: Employer’s Car and expense borne by the employee

45
Scenario Situation 1 Situation 2 Situation 3
Fixed amount per A fixed amount per

Actual cost borne by month as follows month as follows
employer less fixed (Car<1.6cc: Rs (Car<1.6cc: Rs
amounts as below 1800 per month 1800 per month
Mixed usage Car>1.6cc: Rs 2400 Car>1.6cc: Rs 2400
(Car<1.6cc: Rest 1800
of motor per month) per month)
per month Car>1.6cc:
vehicle –
Rest 2400 per month) If the driver is If the driver is
Both private
and personal If the driver is provided provided by the provided by the
use by the employer, employer, further Rs employer, further Rs
further Rest 900 per 900 per month in 900 per month in
month in respect of respect of driver to respect of driver to
driver to be reduced be added be added
Cost to Employer + Cost to Employer +

Usage fully additional wear and additional wear and
for private Cost to Employer tear cost @ 10% per tear cost @ 10% per
purpose annum of the cost of annum of the cost of
vehicle vehicle
The value of taxable perquisite can be calculated as follows
Usage of Movable Assets of the Employer

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Nature of Asset Value of taxable perquisite
Computers and Laptops Nil
Other assets owned by the employer 10% per annum of cost
Other assets taken on lease by the employer Actual hire charges
The value of taxable perquisite can be calculated as follows
Transfer of Movable Assets of the Employer
The value of taxable perquisite can be calculated as follows:
NATURE OF ASSET VALUE OF TAXABLE PERQUISITE
Actual cost Less depreciation charged at 50% by WDV

ELECTRONIC ITEM method for each completed year of usage
AND COMPUTER
MOTOR CAR Actual cost Less depreciation charged at 20% by WDV

method for each completed year of usage
The valuation in respect of other perquisites would depend upon the actual benefit
received by the employee / cost incurred by the employer for providing such a
perquisite.
Example
Following are the details of income of Hamid Sarfraz for the financial year ended
June 30, 2016, who is employed with a company as Senior Manager.
PayRs. 60,000 per month
House rent allowance Rs. 27,000 per month Utilities Rs. 8,000 per month

47
He was provided with a company-maintained car of 800CC. Compute the taxable

income of Hamid Sarfraz for the year if.
The cost of the car to the company was Rs. 500,000 and car was provided for personal
use only.
The cost of the car to the company was Rs. 500,000 and car was provided for business
use only.
The cost of the car to the company was Rs. 500,000 and car was provided partly for
personal and partly for business use.
The car is acquired by company on lease of Rs.850, 000 and the FMV of the car is
Rs.500, 000 and car was provided for personal use only.
Solution:
Particular Case 1 Case 2 Case 3 Case 4

Rs. Rs. Rs. Rs.
Salary (60,000 x 12)
720,000 720,000 720,000 720,000
House Rent allowance (27,000 x 12) 324,000 324,000 324,000 324,000
Utilities (8,000 x 12) Car provided for: 96,000 96,000 96,000 96,000
Personal use only (500,000 x 10%) - - -

50,000
Business use only - - - -
Business and personal use (500,000 x - - 25,000 -
5%)
Personal use only (500,000 x 10%) - - - 50,000
Differences between Allowances and Perquisites
Allowances are paid in cash as a fixed amount of sum on a monthly basis to meet
certain particular requirements for use in the course of the performance of duties. This
amount may or may not be borne by the employee for that specified purpose whereas.
The amount of allowances paid forms part of pay package of the employee whereas
perquisites are additional benefits in addition to the normal salary received by an
48
employee. This may or may not be provided in cash and the amount to be taxed
depends on the value of the benefits received. Perquisite may or `may not form part of
the pay package of the employee
PROFIT IN LIEU OF SALARY:

3.1 MEANING:
(I) the amount of any compensation due to or received by an assessee from his
employer or former employer at or in connection with...
- (A) the termination of his employment or
- (B) The modification of the terms and conditions relating thereto;
(ii) Any payment due to or received by an assessee
- (A) from an employer or a former employer or
- (B) From a provident or other fund to the extent to which it does not consist of
contributions by the assessee or Interest on such contribution or
-(C) any sum received under a Key man Insurance Policy including the sum allocated
by way of bonus on such policy;
(iii) Any amount due to or received, whether in lump sum or otherwise, by any
assessee from any person –
(A) Before his joining any employment with that person; or
(B) After cessation of his employment with that person.]

49
Exceptions: - the following receipts will not be considered for these clauses.
- Any death cum gratuity; it is chargeable under section 17(1) (iii).
- Commuted value of pension; it is chargeable under section 17(1) (ii).
- Retrenchment compensation: - it is chargeable under sub section (I) of section

17(3) above.
Receipts treated as Profit in Lieu of Salary [Section 17(3)] for Computing Salary
Income:
Section 17(3) gives an inclusive definition of "Profits in lieu of salary". As the name
suggests, these payments are received by the employee in lieu of or in addition to
salary or wages. These payments include the following:
(1) Terminal Compensation:
The amount of any compensation due to or received by an assessee from his employer
or former employer at or in connection with the termination of his employment or the
modification of the terms and conditions relating thereto is regarded as profits in lieu
of salary. The termination may be due to retirement, premature termination, and
resignation or otherwise.
(2) Payment from an Unrecognised Provident Fund or an Unrecognized

Superannuation Fund:
The next category of such profit in lieu of salary is payment due to or received by an
assessee from an unrecognised provident fund or an unrecognised superannuation
fund to the extent to which such payment does not consist of contributions by the
employee or interest on such employee's contribution.
In other words, total employer's contribution till date and interest on such employer's
contribution would both be taxable. Employer's contribution and interest thereon and
interest on the employee's contribution are not taxed during the period of

50
employment. When the accumulated balance of such a fund is paid to the employee
either on retirement or on termination of service, the untaxed portion, i.e. the
employer's contribution and interest thereon is taxed as 'profit in lieu of salary'. The
interest on employee's contribution is taxed as 'Income from other sources'.
(3) Payment under Key man Insurance Policy:

Any payment due to or received by an employee, under a Keyman Insurance Policy
including the sum allocated by way of bonus on such policy, will also be regarded as
profit in lieu of salary.
(4) Any amount due or received before joining or after cessation of employment:
Any amounts due to or received, whether in lump sum or otherwise by any
assessee from any person---
(A) Before his joining any employment with that person; or
(B) After cessation of his employment with that person.
(5) Any other sum received by the employee from the employer:
All other payments made by an employer to an employee, would be brought under the
head "Profits in lieu of salary". This is a comprehensive provision by virtue of which
all payments made by an employer to an employee whether made in pursuance of a
legal obligation or voluntarily are brought under profit in lieu of salary.
However, the following receipts, will not be termed as 'profits in lieu of salary' to the
extent they are exempt under section 10.
Death-cum-retirement gratuity — Section 10(10)
Commuted value of pension — Section 10(10A)
Retrenchment compensation received by a workman — Section 10(10B)
Payment received from a statutory provident fund — Section 10(11)
Payment received from recognised provident fund — Section 10(12)
Any payment from an approved superannuation fund as per section 10(13)
House rent allowance exempt under section 10(13A)

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In short, except for the terminal and other payments specifically exempted under
clauses (10) to (13A) of section 10, all other payments received by an employee from
an employer or former employer are liable to tax under this head.
4.10 PROVIDENT FUND:

Provident fund scheme provides for monthly contributions from the employees as
well as the employer to a provident fund a/c. the balance to the cr. of such accounts
also earns interest. The entire balance is paid to an employee on his retirement.
The taxability of….
(1). Employer’s contribution
(2). Interest cried annually
(3). Balance paid on retirement depends upon the type of provident fund
There are different types of provident fund.
Statutory Provident Fund (SPF / GPF)

These are maintained by Government, Semi Govt bodies, Railways, Universities,
Local Authorities etc.
The contributions made by the employer are exempted from income taxes in the year
in which contributions are made.
The contributions made by the employee can be claimed as tax deductions under
section 80c.
Interest amount cr.ed during the financial year is not treated as income and hence it is
exempted from income tax.
The redemption amount at the time of retirement is exempted from tax.
If an employee terminates the PF account, the withdrawal amount too is exempted

from taxes.
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Recognized Provident Fund (RPF):

Any establishment (business entity) which employs 20 or more employees can join
RPF. Most of the individuals (who are salaried) generally contribute to this type of
Provident Fund. This is one of the popular types of Employees Provident
Funds (EPF). (Organizations which employ less than 20 employees can also join
RPF if the employer and employees want to do so)
The business entity can either joins the Govt. scheme set up by the PF Commissioner
(or) the employer himself can manage the scheme by creating a PF Trust. All
Recognized Provident Fund Schemes must be approved by The Commissioner of
Income Tax (CIT).
Employer’s contribution in excess of 12% of salary is treated as income of the

employee and is taxable. In excess of 12%, the contributions are taxable in the year of
contribution.
Tax Deduction u/s. 80C is available for amount invested by the employee (up to Rs
1.5 Lakh in a Financial Year).
Interest amount earned (up to 9.5% interest rate) on PF balance (employee’s +

employer’s contributions) is tax free. In excess of 9.5%, the interest on
contributions is taxable as ‘salary’ in the year in which it is accrued.
Accumulated funds redeemed by the employee at the time of retirement / resignation

are exempt from tax if he/she continues the service for 5years or more.
Unrecognized Provident Fund (UPF)

These are not recognized by Commissioner of Income Tax.
Employer’s contribution is not treated as income in the year of investment and hence
not taxable in that specific year. So, it is tax free in the year of contribution.
Tax deduction under section 80c is not available on Employees contributions.
Interest earned is not treated as income in the year it is cr.ed and hence not taxable in
the year of accrual.

53
At the time of redemption / retirement, the employer’s contributions and interest

thereon is treated as ‘salary income’ and chargeable to tax. However, employee’s
contribution is not chargeable to tax. Interest on Employees contribution will be
charged under income from other sources.
Public Provident Fund (PPF)

Under PPF any individual from public, whether is in employment or not may
contribute to this fund.
The minimum contribution is Rs. 500 p.a. & maximum is Rs 1.5 Lakh Rs. p.a. The
amount is repayable after 15 years.
PPF can serve as an excellent retirement planning / savings tool, for those who do not
come under any pension scheme.
The PPF offers tax benefit under section 8OC and the interest earned is also exempt
from tax. All the eligible withdrawals are exempted from taxes.
Amount Statutory P.F Recognised P.F Unrecognised P.F

[sec.10(11)] [sec. 10(12)] [sec.17(3)]
Employers Exempt Exempt up to 12% Exempt
contribution of basic salary;
during previous excess is taxable
year
Interest cr.ed Exempt Exempt if rate up Exempt
during previous to 9.5%; excess is
year taxable

54
4.11 DEDUCTION FROM SALARY:

Following are the threedeductionsfrom gross salary are allowed vide section 16
STANDARD DEDUCTION [S. 16(IA)]:
The Standard Deduction is a deduction allowed as per the Income Tax irrespective of
the expenses met or the investment made by the individual. An individual need not
disclose any investment proofs or expense bills for this purpose, the Standard
Deduction is allowed at a standard rate.
An amount of Rs 40,000 which can be reduced by taxpayers receiving salary or

pension income, from their gross salary. A similar provision of Standard Deduction
from Salary Income was earlier available but was abolished in the Finance Act
2005(new provision as per Budget 2018-19).
Standard Deduction @ 30% can be reduced from ‘Income from Rent receivables’
under the head ‘Income from House property‘
ENTERTAINMENT ALLOWANCE SEC. 16(II):

Deduction allowable to Govt. employees only to the extent of the least of the following:
5,000
20% of Salary exclusive of any allowance, benefit or other perquisite
Actual entertainment allowance received for the previous year

Note: In case of entertainment allowance the assessee is not entitled to any exemption but he
is entitled to a deduction u/s 16(ii). Therefor the entire entertainment allowance is added in
the computation of gross salary and then the Government employee is entitled to deduction
from gross salary.
PROFESSIONAL TAX DEDUCTION FROM SALARY-U/S16 (III)

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Section 16(iii): As per section 16(iii) of Income tax act, Professional tax on
employment or tax on employment levied by state under article 276(2) of the
Constitution is allowed as a deduction from the Salary income.
Tax should be paidby the Employee: Profession tax should have been paid by the
Employee then only he is eligible to get deduction of the same. IF he has not paid the
same then no deduction is allowed.
Deduction, if Tax paid by the employer on behalf of employee: If such tax is paid
by the employer on behalf of the employee then same amount will be treated as
perquisites and then deduction will also be available to the employee.
Maximum amount under article 276(2): As per article 276(2) of the constitution,
State Govt, municipality or other authority which is authorised under article 276(2)
can impose professional tax on employment from a person maximum up to 2500/year.
Deduction/exemptions [under sec. 10]:
DEDUCTION/EXCEPTION
4.12 LEAVE TRAVEL ALLOWANCE [S.10 (5)]:
Leave Travel Allowance (LTA) is a type of allowance which is given to an employee from
his employer to cover his travel expenses when he is on leave from work. Sometimes it is also
known as Leave Travel Concession (LTC). LTA is exempt from tax u/s 10(5) of Income Tax
Act, 1961.
LTA can be broadly categorized into two parts:
Any travel concession or assistance received by employee from his employer for himself and
his family to cover expenses incurred in travelling while on leave.
Any travel concession or assistance received by employee from his former employer for
himself or his family to cover expenses incurred in travelling post retirement or termination of
service.
Note: For the purpose of this section, family includes:
Spouse of individual
Children of individual
Parents of individual (mainly or wholly dependent on the individual)
Brothers and sisters of individual (mainly or wholly dependent on the individual)

56
Leave Travel Concession rules:
People incur several kinds of expenses during their holiday trip but not all of them are
covered by LTA.
Expenses made on food, shopping, etc. are not tax deductible.
Only the expenses made by employee on travelling are born by the employer for
which he provides Leave Travel Allowance to the employee.
The individual has to keep proof of travel as it can be required for tax auditing
purposes.
Exemption is allowed for only two travels within a block of four years.
Depending on the mode of transportation chosen and connectivity of the place,

amount of exemption is decided.
List of Expenses Exempt under LTA:
IN CASE OF TRAVEL BY AIR
The economy air fare of national carrier by the shortest route or the actual amount
spent on travel whichever is less is exempt from tax.
IN CASE OF TRAVEL BY RAIL
The A.C. first class rail fare by shortest route or actual amount spent on travel
whichever is less is exempt from tax.
If the origin and destination spots of journey are connected by rail but journey is
performed by other mode of transport and not air or rail
The A.C. first class rail fare by shortest route or actual amount spent on travel,
whichever is less is exempt from tax.
If the origin & destination points are not connected by rail or air (partly/fully)
but connected by other recognized Public transport system
The first class or deluxe class fare of such transport by shortest route or actual amount
spent on travel, whichever is less is exempt from tax.
If the place of origin & destination is not connected by rail or air (partly/fully)
and also not connected by other recognized Public transport system

57
The AC first class rail fare by shortest route (assuming that the journey was
performed by rail) or the amount actually spent on travel, whichever is less is exempt
from tax.
Carry Over Concession:
If the assessee did not use LTA provided by his employer either once or twice (the
permitted limit) in a 4 years block period, then he can still claim LTA exemption by
using LTA in the year immediately succeeding the 4 years block period. It is known
as carry over concession. The current or on-going block year is the 9th block year.
The 4 years in this block are the years 2018, 2019, 2020 and 2021.
Limitations or Restrictions Applicable under LTA
Leave Travel Allowance covers only domestic travel, i.e. only within India.
International travel is not covered under this.
To claim LTA, the mode of travel should be air, railway or public transport.
LTA is provided for only travel expenses.
Tax exemption on LTA cannot be claimed for more than 2 children on an individual.
This restriction is not applicable if children are born before October 1st 1998.
Children born out of multiple births after the first child will be treated as one child
only. So, the above-mentioned restriction will not be applicable in this case also.
RETRENCHMENT COMPENSATION -SECTION 10(10B):

Section 10(10B) of the Income Tax Act provides for Exemption on Retrenchment
Compensation. Income Tax Section 10(10B) shall be read in association with Section
89. When an Undertaking is being closed down, the workmen will be paid a
compensation for the act of Retrenchment. Such amount paid to workers shall be
exempt under section 10(10B) of the Income Tax act. You should note that the scope
of Section 10(10B) is very limited.
Scope of Section 10(10B) Income Tax Act

58
Any compensation received by a workman under the Industrial Disputes Act, 1947 or under
any other Act or rules, orders or notifications issued thereunder or under any standing orders
or under any award, contract of service or otherwise, at the time of his retrenchment. The
amount is exempt under this clause to the extent of least of the following limits:
Actual amount received.
Amount specified by Central Government i.e. Rs.5, 00,000.
An amount calculated in accordance with the provisions of clause (b) of Section 25F
of the Industrial Disputes Act, 1947 i.e. 15 day’s average pay for every completed
year of services or part thereof in excess of 6 months
Meaning u/s 10(10B) Income Tax Act
For this purpose retrenchment includes the closing down of the undertaking and
transfer of the ownership or management of the undertaking provided the service of
the workman has been interrupted by transfer; or the new terms and conditions of
service are less favourable to him; or the new employer is, under the terms of transfer
or otherwise legally not liable to pay to the workman, in the event of his
retrenchment, compensation on the basis that his service has been continuous and has
not been interrupted by the transfer. “Wages”, in the context of Section 10(10B),
means:
All remuneration capable of being expressed in terms of money, which would be

payable to a workman in respect of employment or of work done in such employment,
if the terms of employment, express or implied, were fulfilled.
Wages under section 10(10B) Income Tax Act
The term “Wages” also include (I) such allowances, including DA as the workman is
entitled to; (ii) the value of any house accommodation, or supply of light, water,
medical attendance or other amenity, or of any other service, concessional supply of
food grains, or other articles; and (iii) any travel concession
However, “wages do not include: (I) any bonus; (ii) contribution to a retirement
benefit scheme; (iii) any gratuity payable on the termination of his service
Tax on Non-monetary Perquisites, paid by Employer Section 10(10CC) –
Tax may be paid by the employer, on a Perquisite provided to the employee (other
than by way of monetary payment), within the meaning of section 17(2). Such tax
actually paid by the employer, at the option of the employer, on behalf of such
59
employee, (notwithstanding anything contained in section 200 of the Companies Act,

1956), shall be exempt in the hands of employee.
The Companies Act, 1956 defined remuneration under section 198 by way of an
explanation and provided for the certain specific inclusions that would be construed as
remuneration. Section 200 of the 1956 Act specifically prohibited “tax free
payments”.
The High court clearly distinguished payment of “tax free remuneration” by an

employer which is prohibited under the company’s act, 1956 vis-s-vis the “payment
of specified benefits free of tax” which is specifically permitted by the tax law
providing an overriding effect on the provisions of companies act.
Also, to be noted that, as per the New Companies Act, 2013, Definition of
remuneration has undergone few changes. Section 2(78) of the 2013 Act, defines
“Remuneration” as any money or its equivalent given or passed to any person for
services rendered by him and includes perquisites as defined under the income tax
Act, 1961. The remuneration thus defined includes reimbursement of any direct taxes
to managerial personnel
4.13RETIREMENT BENEFIT:
THE PAYMENT OF GRATUITY ACT, 1972

INTRODUCTION
[21st August, 1972]
An Act to provide for a scheme for the payment of gratuity to employees engaged in
factories, mines, oilfields, plantations, ports, railway companies, shops or other
establishments and for matters connected therewith or incidental thereto.
Be it enacted by Parliament in the Twenty-third Year of the Republic of India as

follows:

60
1. Short title, extent, application and commencement. - (1) This Act may be called
the Payment of Gratuity Act, 1972.
It extends to the whole of India:
Provided that in so far as it relates to plantations or ports, it shall not extend to the
State of Jammu and Kashmir.
It shall apply to-
Every factory, mine, oilfield, plantation, port and Railway Company;
every shop or establishment within the meaning of any law for the time being in force
in relation to shops and establishments in a State, in which ten or more persons are
employed, or were employed, on any day of the preceding twelve months;
Such other establishments or class of establishments, in which ten or more employees

are employed, or were employed, on any day of the preceding twelve months, as the
Central Government may, by notification, specify in this behalf.
[(3-A) A shop or establishment to which this Act has become applicable shall
continue to be governed by this Act, notwithstanding that the number of persons
employed therein at any time after it has become so applicable falls below ten.]
It shall come into force on such dates the Central Government may, by notification,
appoint
GRATUITY [S. 10(10)]:

Gratuity is a monetary benefit given by the employer to his employee on the occurrence of
any of the following events:
a. On superannuation (means an employee who attains the age of retirement is said to

be in superannuation)
b. On retirement or resignation
c. 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)
It is mandatory for the employee to have completed minimum of five years in service
to be able to receive gratuity. It is not applicable to interns or temporary employees.
Gratuity is not paid as part of your regular monthly salary; it is only payable on the
61
occurrence of any of the above events. The provisions of gratuity are governed by the
Payment of Gratuity Act, 1972.
Section 94 of that Code.]
Recovery of Gratuity.- If the amount of gratuity payable under this Act is not paid
by the employer, within the prescribed time, to the person entitled thereto, the
controlling authority shall, on an application made to it in this behalf by the aggrieved
person, issue a certificate for that amount to the Collector, who shall recover the
same, together with compound interest thereon [at such rate as the Central
Government may, by notification, specify] from the date of expiry of the prescribed
time, as arrears of land revenue and pay the same to the person entitled thereto:
[Provided that the Controlling Authority shall, before issuing a certificate under this
section, give the employer a reasonable opportunity of showing cause against the
issue of such certificate:
Provided further that the amount of interest payable under this section shall, in no
case, exceed the amount of gratuity payable under this Act].
Penalties. - (1) Whoever, for the purpose of avoiding any payment to be made by
himself under this Act or of enabling any other person to avoid such payment,
knowingly makes or causes to be made any false statement or false representation
shall be punishable with imprisonment for a term which may 11
Extend to six months, or with fine which may extend to [ten thousand rupees] or with
both.
(2) An employer who contravenes, or makes default in complying with, any of the
provisions of this Act or any rule or order made thereunder shall be punishable with
imprisonment for a term [which shall not be less than three months but which may
extend to one year, or with fine which shall not be less than ten thousand rupees but
which may extend to twenty thousand rupees, or with both]:
Provided that where the offence relates to non-payment of any gratuity payable under
this Act, the employer shall be punishable with imprisonment, for a term which shall
not be less than six months but which may extend to two years] unless the Court

62
trying the offence, for reasons to be recorded by it in writing, is of opinion that a

lesser term of imprisonment or the imposition of a fine would meet the ends of justice.
Exemption of employer from liability in certain cases.- Where an employer is

charged with an offence punishable under this Act, he shall be entitled, upon
complaint duly made by him and on giving to the complainant not less than three
clear days' notice in writing of his intention to do so, to have any other person whom
he charges as the actual offender brought before the Court at the time appointed for
hearing the charge; and if, after the commission of the offence has been proved, the
employer proves to the satisfaction of the Court-
That he has used due diligence to enforce the execution of this Act; and
That the said other person committed the offence in question without his knowledge,
consent or connivance,
That other person shall be convicted of the offence and shall be liable to the like other
punishment as if he were the employer and the employer shall be discharged from any
liability under this Act in respect of such offence:
Provided that in seeking to prove as aforesaid, the employer may be examined on oath
and his evidence and that of any witness whom he calls in his support shall be subject
to cross-examination on behalf of the person he charges as the actual offender and by
the prosecutor:
Provided further that, if the person charged as the actual offender by the employer
cannot be brought before the Court at the time appointed for hearing the charge, the
Court shall adjourn the hearing from time to time for a period not exceeding three
months and if by the end of the said period the person charged as the actual offender
cannot still be brought before the Court, the Court shall proceed to hear the charge
against the employer and shall, if the offence be proved, convict the employer.
Cognizance of Offence. - (1) No Court shall take cognizance of any offence

punishable under this Act save on a complaint made by or under the authority of the
appropriate Government:

63
Provided that where the amount of gratuity has not been paid, or recovered, within six
months from the expiry of the prescribed time, the appropriate Government shall
authorise the controlling authority to make a complaint against the employer,
whereupon the controlling authority shall, within fifteen days from the date of such
authorisation, make such complaint to a Magistrate having jurisdiction to try the
offence.
Sec. 12
(2) No Court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of

the first class] shall try any offence punishable under this Act.
Protection of action taken in good faith. - No suit or other legal proceeding shall lie
against the Controlling Authority or any other person in respect of anything which is
in good faith done or intended to be done under this Act or any rule or order made
thereunder.
Protection of gratuity. - No gratuity payable under this Act and no gratuity payable
to an employee employed in any establishment, factory, mine, oilfield, plantation,
port, railway company or shop exempted under Section 5] shall be liable to
attachment in execution of any decree or order of any civil, revenue or criminal court.
Validation of payment of gratuity.- Notwithstanding anything contained in any

judgement, decree or order of any court, for the period commencing on and from the
3rd day of April, 1997 and ending on the day on which the Payment of Gratuity
(Amendment) Act, 2009, receives the assent of the President, the gratuity shall be
payable to an employee in pursuance of the notification of the Government of India in
the Ministry of Labour and Employment vide number S.O. 1080, dated the 3rd day of
April, 1997 and the said notification shall be valid and shall be deemed always to
have been valid as if the Payment of Gratuity (Amendment) Act, 2009 had been in
force at all material times and the gratuity shall be payable accordingly:
Provided that nothing contained in this section shall extend, or be construed to extend,
to affect any person with any punishment or penalty whatsoever by reason of the non-

64
payment by him of the gratuity during the period specified in this section which shall
become due in pursuance of the said notification.]
Act to override other enactments, etc.- The provisions of this Act or any rule made
thereunder shall have effect notwithstanding anything inconsistent therewith
contained in any enactment other than this Act or in any instrument or contract having
effect by virtue of any enactment other than this Act.
Power to make rules. - (1) the appropriate Government may, by notification, make
rules for the purpose of carrying out the provisions of this Act.
(2) Every rule made by the Central Government under this Act shall be laid, as soon
as may be after it is made, before each House of Parliament while it is in session, for a
total period of thirty days which may be comprised in one session or in two or more
successive sessions, and if, before the expiry of the session immediately following the
session or the successive sessions aforesaid, both Houses agree in making any
modification in the rule or both Houses agree that the rule should not be made, the
rule shall, thereafter, have effect only in such modified form or be of no effect, as the
case may be; so, however, that any such modification or annulment shall be without
prejudice to the validity of anything previously done under that rule.
Employees Covered Under the Payment of Gratuity Act:

Every person working in a factory, mine, oil field, port, railways, plantation, shops &
establishments, or educational institution having 10 or more employees on any day in the
preceding 12 months is entitled to gratuity. Once the Act becomes applicable to an employer
– even if the number of employees goes below 10, gratuity is still applicable.
Calculation of amount of gratuity exempted from tax
The least of the following is exempt from tax:
Last salary (basic + DA) *number of years of employment* 15/26;
Rs. 20 lakhs (which has been hiked from Rs. 10 Lakh as per the amendment);
Gratuity actually received

65
Let us understand this impact through an illustration:
The last salary drawn by Rohan is Rs.1 Lakh per month (basic + DA). He is entitled to
receive a gratuity of Rs. 11 Lakhs. He has been in employment for the last 19 years and 7
months.
Points to note:
15 days salary based on the salary last drawn for every completed year of service or
part thereof i.e. 15/26.
Number of years in service is rounded off to the nearest full year
Employees Not Covered Under the Payment of Gratuity Act

There is no law that restricts an employer from paying gratuity to his employees, even if the
organization is not covered under the Payment of Gratuity Act. The amount of gratuity
payable to the employee can be calculated based on half month’s salary for each completed
year.
Calculation of amount of gratuity exempted from tax
The least of the following are exempt from tax:
Last 10 month’s average salary (basic + DA) * number of years of employment* 1/2;
Rs. 10 lakhs (the hike to Rs 20 lakhs is not applicable for employees not covered
under the Payment of Gratuity Act)
Gratuity actually received
GOVERNMENT EMPLOYEES
Gratuity paid by the government to government employees is fully exempt from
tax.

66
GRATUIT
GRATUITY
Y
RECEIVED DURING RECEIVED AT THE

SERVICE TIME OF
RETIREMENT/DEATH
FULLY
TAXAB GOVERNMENT NON-GOVT.
LE EMPLOYEES EMPLOYEES
FULLY
EXEMP
Covered under NOT Covered
T
payment of gratuity under payment of
ACT,1972 gratuity ACT,1972
Least of the following would Least of the following would be

be exempt: exempt:
RS. 20 LAKHS RS. 20 LAKHS
GRATUITY RECEIVED GRATUITY RECEIVED
15 DAYS SALARY (Based Half month salary (based on
on last drawn salary) every average of last 10 month’s
completed year of service or salary) for every completed
part in excess of 6 month (no year of service (No. of days in a
of month to be taken as 26) month to be taken as 30)

67
8.2 PENSION
Per section 10(10A), any commuted pension, i.e., accumulated pension in lieu of
monthly pension received by a Government employee is fully exempt from tax.
Exemption is available only in respect of commuted pension and not in respect of un-
commuted, i.e., monthly pension
Pension can be divided into two types:
Uncommuted Pension
Commuted Pension
Uncommuted Pension –
It is taxable as salary under section 15 in the hands of a Government employee as well

as a non - Government employee.
Commuted Pension
Is received in one time rather in instalments.
In case of employees of Central & State Govt. or Local Authority or statutory

corporation, the entire commuted value of pension is exempt 10(10A) (I).
Payment in commutation of pension received by any other employee-
In case of any other employee, if the employee receives gratuity, the commuted value
of one third (1/3) of the pension is exempt, otherwise, the commuted value of ½ of the
pension is exempt.
If payment in commutation of pension received by the employee exceeds the

aforesaid limits. Such excess is liable to tax in the assessment year relevant to the
previous in which it is due or paid .The assessee can, however, claim relief in term
of section 89 read with rule 21A .
National Pension scheme in case of an employee joining Central

Government on or after January 1, 2004 or any other employer- These provisions
are given below-
1. Contribution by the Central Government or any other employer to the

National Pension System (NPS) is first included under the head ''Salaries" in the
hands of the employee.

68
2. Such contribution is deductible (to the extent of 10 percent of the salary of the
employee) under section 80CCD (2).
3. Employee’s contribution to NPS (to the extent of 10 percent of the salary of

the employee orRS 100, 0001, whichever is less) is deductible under section 80CCD
(1)2
4. When pension is received out of the aforesaid amount, it will be chargeable to

tax in the hands of recipient.
5.The aggregate amount of deduction under section

80C ,80CCC and 80CCD(1) (contribution by employee (or any other individual )
towards NPS) cannot exceed RS 150,000*.
6. ‘‘Salary” means basic salary and dearness allowance (if the term of
employment so provide) but excludes all other allowance and perquisites. It also
includes commission if commission is payable at a fixed percentage of turnover
achieved by an employee.
* From the assessment year 2012-2013 employer 'contribution towards NPS is

not considered for the purpose of monetary ceiling of RS 150,000.
1. This ceiling of RS 100,000 is not applicable from the assessment year

2016-2017.
2. From the assessment year 2016-2017 ,a new sub section (1B) has been
inserted in section 80CCD so as to provide for an additional deduction in respect
of any amount paid (up to RS 50000) for contribution made by any individual
assessee under the NPS . On this additional contribution, the
Ceiling of RS 1, 50,000(as given above) will not applicable.

69
Pension
commuted Uncommuted
Fully taxable
Employee of the central Non-govt. employees
govt./ local authorities/
statutory corporation/
member of defence service
If employee does not receive

If employee is in receipt of any gratuity
gratuity
1/2 x (commuted pension received/

1/3 x (commuted pension received/
commutation %) x 100, would be
commutation %) x 100, would be
exempt
exempt

70
4.14 LEAVE ENCASHMENT / LEAVESALARY:

Meaning: Leave Salary or Leave Encasement means the amount receives by the
employee against the leaves he was given but he has not utilized.
The taxability of the leave encashment amount comes under the ambit of section
10(10AA), which depends upon the fulfilment of certain conditions given under the
income tax act. Let’s dig this section deeper:
LEAVE ENCASHMENT ON RESIGNATION IS NOT TAXABLE
According to section 10(10AA) of the Income Tax Act the tax treatment on leave
encashment amount received by employee depend upon the following two situations:
LEAVE ENCASHMENT WHILE BEING EMPLOYED IN THE COMPANY
While in service leave salary is fully taxable in the hands of employee under Section
17(1) (VA), irrespective of the sector the employee is employed with i.e. Government
Sector or Private sector.
LEAVE ENCASHMENT WHEN EMPLOYEE IS LEAVING THE

ORGANIZATION:
For a Government Employee: The entire amount of leave encashment is tax-free

for government employee (central or state) under Section 10(10AA) (I)
For a Private Sector Employee: Leave encashment is partly exempted (under

Section10 (10AA) up to the least of the following:
Leave encashment actually received at the time of retirement.
Standard Limit of Rs. 3, 00,000/-
Ten months’ average salary from the date of retirement;

71
Cash equivalent of 30 days average salary for every completed year of service as
reduced by actual leave availed or encashed during the tenure of service.
Note:
The period of 30 days is the maximum ceiling. If employer allows leave for less than
30 days p.a. then such lesser days shall be considered.
Average salary means Basic + DA (forming part of retirement benefit) + Commission

(as a fixed percentage on turnover) being last 10 months average salary from the date
of retirement.
While calculating completed year of service, ignore any fraction of the year.
While claiming the statutory amount (i.e. Rs.300000) any deduction claimed earlier
as leave encashment shall be reduced from Rs.300000 Assessee can claim Relief u/s
89(1)
Is the Leave encashment exempt only on retirement or also on resignation?
Section 10(10AA) clearly states, ’on retirement or otherwise’’; the key word here is
‘otherwise’, which suggest there are certain exemptions in the case of a person
leaving his job for reasons other than retirement.
It is, therefore, clear that if on retirement, even on resignation by the employee, an

employee gets by way of leave encashment any amount, Sec. 10(10AA) would apply
and the assessee will be entitled to the benefit of the said clause to the extent
mentioned therein.
Tax on Leave Encashment / salary paid to the legal heir
Leave salary paid to the legal heir of deceased employee is not taxable as salary. The
Act is silent on treatment of leave encashment received after death of employee.
However, on following grounds, it can be concluded that leave salary received by a
legal heir shall not be taxable in the hands of the recipient.
a) A lump sum payment made gratuitously to widow or legal heir of employee, who
dies while in service, by way of compensation or otherwise is not taxable under the
head ‘Salaries’.
b) Unutilized deposit under the capital gains deposit account scheme shall not be
taxable in the hands of legal heir

72
c) Legal representative is not liable for payment of tax on income that has not accrued
to the deceased till his death.
d) Leave salary paid to the legal heir of deceased employee is not taxable as salary.].
Further, leave salary by a legal heir of the Government employee who died in harness
is not taxable in the hands of the recipient
'Retirement Compensation' from a Public Sector Company or any

other Company is Exempt from Tax [Section 10(10C)]
Based on the employer’s leave encashment policy and income of an individual, tax
planning can be made by deciding whether it is beneficial to encash leave year on
year or to receive lump sum at the time of retirement or resignation. One may
consider cost of inflation as well before deciding on the same.
If an employee receives compensation (whether in one go or in instalments) on

voluntary retirement or separation, Section 10(10C) provides for exemption for such
amount, subject to a maximum of Rs. 5,00,000.
This exemption is available to employee of any of the following: -
(I) a public sector companies
(ii) Any other company
(iii) An authority established under a Central, State or Provincial Act
(iv) A local authority
(v) a co-operative society
(vi) a University established or incorporated by or under a Central, State or Provincial

Act and an institution declared to be a University under section 3 of the University
Grants Commission Act, 1956
(vii) an Indian Institute of Technology within the meaning of clause (g) of section 378
of the Institutes of Technology Act, 1961 (59 of 1961)
(viii) any State Government
(ix) the Central Government

73
(x) an institution, having importance throughout India or in any State or States, as the
Central Government may, by notification in the Official Gazette82, specify in this
behalf
(xi) such institute of management as the Central Government may, by notification83

in the Official Gazette, specify in this behalf
Conditions for claiming exemption [Rule 2BA]
It applies to an employee who has completed 10 years of service or completed 40

years of age. (This condition doesn’t apply to employees of public sector company)
It applies to all employees including workers and executives except directors of a

company or co-operative society.
Such scheme has been drawn to result in overall reduction in no. of employees
The vacancy caused by voluntary retirement is not to be filled up.
The retiring employees of a company shall not be employed in another company or

concern belonging to the same management.
Amount receivable on account of voluntary retirement does not exceed either of the
following amounts
3 months x salary last drawn x completed year of service
Salary last drawn x balance of months left before the date of retirement or
superannuation
Salary includes basic pay, dearness allowance (if it forms part of the retirement
benefits) and percentage wise fixed commission on turnover
Notes: - If the assessee has already taken relief under section 89, then exemption
under this section is not available.
Deduction under section 10(10C) can be taken once only, therefore if deduction under
this section is taken once then deduction is not available in any subsequent years

74
ILLUSTRATIONS ON INCOME FROM SALARIES
Illustration 1.
Mr. has joined ICC Ltd. on 1st July 2008 in the scale of `15,000-1,500-21,000-2,500-
31,000. Compute gross salary for the previous year 2011-12.
Solution:
Previous Year: 2011-12
Salary for(I) April 2011 to June 2011 = 18,000 × 3 = 54,000

(ii) July 2011 to March 2012 = 19,500 × 9 = 1,75,500
Gross Salary 2,29,500
Workings:
Previous Year April to June July to March
2008-09 Nil 15,000
2009-10 15,000 16,500
2010-11 16,500 18,000
2011-12 18,000 19,500
Illustration 2.
Mr. Kabir is getting a salary of `12,000 p.m. w.e.f. 1.4.2010. He is promoted w.e.f.
31.12.2010 and got arrears of `75,000. Bonus for the year 2011-12 is ` 15,000 remains
outstanding but bonus of ` 12,000 for the year 2010-11 was paid on 1st January 2012.
In March 2012, he got two months’ salary i.e. April and May 2012 in advance.
Compute the gross salary for the assessment year 2012-13.

75
Solution:
Computation of Gross Salary for the Assessment Year 2012-13
Salary:` 12,000 × 12 1,44,000

Arrears of Salary 75,000
Bonus for the year 2011-12: (Receivable) —
Bonus for the year 2010-11: (Received) 12,000
Advance of Salary: April & May 2012 (12,000 × 2) 24,000
Illustration 3.Anal Kumar, an Indian citizen, is posted in the Indian High

Commission at Nairobi during the previous year 2011-12.
His emoluments consist of Basic Pay of `1, 50,000 per month and overseas allowance
of ` 60,000 per month. Besides, he is entitled to &for journey to India and also use
Government’s car at Nairobi. He has no taxable income except salary income stated
above.
Compute tax liability if (I) he is a non-resident during the previous year 2011-12 and
(ii) he is a foreign citizen.
Solution:
(1) U/s 9(1)(iii), Salary paid by the Government of India to an Indian
citizen for services rendered outside India is deemed to accrue or arise in India
and is therefore taxable in India.
(2) U/s 10(7), allowances or perquisites paid by the Government of India
to an Indian citizen or services rendered outside India, is fully exempt from tax.

76
(3) Computation of Taxable Salary for the Previous Year 2011-12
Particulars Rs Rs
Salary (1,50,000 × 12) 18,00,000
Overseas Allowance (60,000 × 12) 7,20,000
Less: Exempt u/s 10(7) 7,20,000 Nil
Less: Deduction u/s 16 Nil
Income under the head Salaries 18,00,000
HOUSE RENT ALLOWANCE [Sec.10 (13A) Rule 2A]
Illustration 4. A, is entitled to a basic salary of `5,000 p.m. and dearness allowance of

`1,000p.m., 40% of which forms part of retirement benefits. He is also entitled to
HRA of `2,000 p.m. He actually pays `2,000 p.m. as rent for a house in Delhi.
Compute the taxable HRA.
Solution:
Salary for HRA= Basic Pay + D.A. (considered for retirement benefits) +
Commission (if received as a fixed percentage on turnover as per terms of
employment) = (5,000 × 12) + (40% × 1,000 × 12) = 64,800
Taxable HRA:
Particulars ` `
Amount received during the financial year for HRA 24,000

77
Less: Exemption u/s 10(13A) Rule 2A Least of the followings:

(a) Actual amount received 24,000
(b) 50% of Salary of `64,800 32,400
(c) Rent paid less 10% of Salary [2,000 × 12 – 10% of 64,800] 17,520 17,520
Taxable HRA 6,480
Illustration 5. X, is employed at Delhi as Finance Manager of R Ltd. The particulars

of his salary for the previous year 2011-12 are as under: Basic Salary `16,000 p.m.
Dearness allowance `12,000 p.m. Conveyance Allowance for personal purpose
`2,000p.m.; Commission @2% of the turnover achieved which were`9, 00,000 during
the previous year and the same was evenly spread. HRA `6,000 pm. The actual rent
paid by him `5,000 pm for an accommodation at till 31.12.11. From 1.1.12 the rent
was increased to `7,000 pm. Compute taxable HRA.
Note: If there is an increase in rent paid, it is advisable to calculate the exemptions

separately based on the time period. Rent before and after increase.
Solution:
Salary for HRA (for 9 months) = Basic Pay + DA (considered for retirement
benefits) + Commission (if received as a fixed percentage on turnover as per terms of
employment)
= (16,000 × 9) + (12,000 × 9) + (2% of 9, 00,000 × 9/12) = 2, 65,500
Taxable HRA: (April to December 2011). Total time=9 months
Particulars RS RS
Less: Exemption u/s 10 (13A) Rules 2A.

Least of the followings:
(b) 50% of Salary 1,32,750

78
(c) Rent paid less 10% of Salary 18,450 18,450

[5,000 × 9 – 10% of 2,65,500]
Taxable HRA 35,550
employment) = (16,000 × 3) + (12,000 × 3) + (2% of 9, 00,000 × 3/12) = 88,500
Taxable HRA:
Particulars Rs Rs
Less: Exemption u/s 10(13A) Rule 2A

(b) 50% of Salary 44,250
(c) Rent paid less 10% of Salary

[7,000 × 3 – 10% of 88,500] 12,150 12,150
Taxable HRA 5,850
Illustration 6.
Z is employed in A Ltd. As on 31.3.11, his basic salary ` 6,000 p.m. He is also

entitled to a dearness allowance of 50% of basic salary. 70% of the dearness
allowance is considered for retirement benefits. The company gives him HRA `
3,000pm. With effect from 1.1.11 he receives an increment of ` 1,000 in his basic
salary. was staying with his parents till 31.10.2011. From 1.11.10 he takes an
accommodation on rent in Delhi and pays ` 2,500 pm as rent for the accommodation.
Compute taxable HRA for the assessment year 2012-13.
Solution:
79
Salary for the purpose of HRA shall cover the time period for which the assesse, who
is in receipt of HRA, resided in a rented accommodation and the rent paid by such
assessee, is more than 10% of salary.
employment)
Basic Pay = (5,000 × 2) + (6,000 × 3) =28,000

DA = 50% of Basic Pay × 70% forming part of retirement benefits
[50 % × 28,000 × 70%] = 9,800
Total Salary for HRA 37,800
Taxable HRA:
Particulars ` `
Amount received during the financial year for HRA (3,000 × 36,000
12)
Less: Exemption u/s 10 (13A) Rules 2A.

(d) Actual amount received 36,000
(e) 50% of Salary 18,900
(f) Rent paid less 10% of Salary
[2,500x 5 – 10% of 37,800] 8,720 8,720
Taxable HRA 27,280
GRATUITY
Illustration7.
Mr. Hari retires on 15th October 2011, after serving 30 years and 7 months. He gets
`3, 80,000 as gratuity. His salary details are given below:
Determine his gross salary in the following cases:

80
(i) He retires from government service

(ii) He retires from seasonal factory in a private sector, covered under Payment of
Gratuity Act, 1972.
(iii) He retires from non-seasonal factory, covered by Payment of Gratuity Act,
1972 (iv) He retires from private sector, not covered by payment of Gratuity Act
Solution:
(i) The amount of gratuity received as a Government employee is fully
exempt from tax u/s 10(10)(I)
(ii) As an employee of a seasonal factory, in a private sector, covered
under the
(iii) Payment of Gratuity Act, 1972
FY 2011- D.A. 50% of salary. 40% forms part of retirement

12 Salary `16,000 pm benefits.
FY 2010- Salary `15,000 pm D.A. 50% of salary. 40% forms part of retirement
11 benefits
As an employee of a non-seasonal factory, covered by Payment of Gratuity Act, 1972
As an employee of a private sector, not covered by Payment of Gratuity Act,

1972
Computation of Taxable Gratuity
Particulars ` `
Amount received as Gratuity 3,80,000
Less: Exemption u/s 10(10)(ii)
(I) Actual amount received 3,80,000
(ii) 15/26 × Last drawn salary × No. of years of completed 4,29,231
service or part thereof in excess of 6 months
[15/26 × 31 × 24,000]
(iii) Maximum Limit 10,00,000 3,80,000
Taxable Gratuity NIL

81
Particulars ` `
Less: Exemption u/s 10(10)(iii) Least of the followings:

(ii) 1/2 × Average salary × No. of fully completed years of service
[½ × 18,720 × 30] 2,80,800
Taxable Gratuity
99,200
Note: Salary = Basic Pay + Dearness Allowance

In case of seasonal employment, instead of 15 days, 7 days shall be considered.
Note: Salary = 10 months average salary preceding the month of retirement.
= Basic Pay + Dearness Allowance considered for retirement benefits +
commission
(if received as a fixed percentage on turnover)
Salary for the months December ’10 till September ’11 shall have to be considered.
Basic Salary: `
December ’10 to March ’11 = 15,000 × 4 =
60,000
April ’11 to September ’11 = 16,000 × 6 =
96,000
Total Basic Salary 1,56,000
Add: D.A. [50% of 1,56,000 × 40%, forming part of
superannuation benefits] 31,200
Salary for 10 months 1,87,200
Therefore, Average salary for 10 months = 1, 87,200/10 = 18,720
Illustration 8. Rosaria was an employee of Z Ltd. After 38 years of service, he retired

on 28.2.12. He was drawing a monthly salary of `18,000. On retirement he received a

82
gratuity of `4, 00,000. Compute taxable gratuity. Solution: Assuming employee not
covered by Payment of Gratuity Act, 1972
Computation of Taxable Gratuity
Particulars ` `
Less: Exemption u/s 10(10)(iii) Least of the followings:

(ii) 1/2 × Average salary × No. of fully completed years of service [½ 3,42,000
×18,000×38]
Taxable Gratuity 58,000
Note: Salary = 10 months average salary preceding the month of retirement.

= Basic Pay + Dearness Allowance considered for retirement benefits + commission
(if received as a fixed percentage on turnover)
In this case, Average salary for 10 months preceding the month of retirement is `
18,000 only.
PENSION
Illustration 9. Mr. King is getting a salary of `5,400 pm since 1.1.10 and dearness
allowance of `3,500 pm, 50% of which is a part of retirement benefits. He retires on
30th November 2011 after 30 years and 11 months of service. His pension is fixed at `
3,800 pm. On 1st February 2012 he gets 3/4ths of the pension commuted at `1, 59,000.
Compute his gross salary for the previous year 2011-12 in the following cases:
(i) If he is a government employee, getting gratuity of ` 1,90,000
(ii) If he is an employee of a private company, getting gratuity of ` 1,
90,000 (iii) If he is an employee of a private company but gets no
gratuity.

83
Solution:
Previous Year 2011-12. Tenure of Service: 1.4.11 to 30.11.11 = 8 months
Post-retirement period: December ’11 to March ‘12 = 4 months
Particulars Case (I) Case (ii) Case (iii)
Salary 43,200 43,200 43,200
D.A 28,000 28,000 28,000
Taxable Gratuity Exempted 82,750 Nil
Uncommuted Pension [(3,800×2) +(950×2)] 9,500 9,500 9,500
Commuted Value of Pension Exempted 88,333
Gross Salary
Case (ii) Gratuity received by an employee of a private company
PARTICULARS RS. RS.

Actual amount received 1,90,000
Less: Exempted amount (least of the followings):
(ii) ½ x Vascular x No. of years of Completed service [½ × 7,150 × 30] 1,07,250
Taxable Gratuity 82,750
Commuted Value of Pension

(Non-govt employee, gratuity received)
Actual commuted value of pension received 1,59,000
Less: Exempted u/s 10(10A) 70,667
1/3rd of Full Value of Commuted Pension [1/3 × 2,12,000]
Full Value of Commuted Pension
Amount received on commutation1,59,000
Percentage of pension commuted75% of 2,12,000 88,333

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Taxable Commuted Value of Pension,
Case (iii) Commuted Value of Pension (Non-govt employee, gratuity not received)
Actual commuted value of pension received 1,59,000
Less: Exempted u/s 10(10A) 1,06,000

1/2 of Full Value of Commuted Pension [1/2 × 2,12,000]
Full Value of Commuted Pension
Amount received on commutation1,59,000
= = 2,12,000
Percentage of pension commuted 75%
Taxable Commuted Value of Pension 53,000
LEAVE ENCASHMENT
Illustration 10
Ms. Parineeti retired from service after 28 years from ABC Ltd. Leave sanctioned by
employer 45 days p.a. Leave availed during service 400 days. Leave encashment
received: ` 4, 30,000. Average salary for 10 months preceding the month of retirement
`15,000. Compute taxable amount of Leave encashment for the Previous year 2011-
12.
Solution:
Particulars `
85
(I) Leave cr. available on the date of retirement 860

= Total Leave sanctioned during tenure of employment – Total
leave availed during service
420
= [(28 x 45) – 400]
Less: Excess leave sanctioned by the employer
[(45– 30 days) per year x 28) 440
Leave cr. on the basis of 30 days cr. for completed years of service
(ii) Leave salary on the basis of 30 days cr. = Step (I) × Average Salary = 440 × 2,20,000
(15,000/30)
Since leave sanctioned by the employer is more than 30days p.a., the following
calculation is required, to determine the amount of leave cr. on the date of retirement
Taxable Leave Salary on Retirement
Particulars ` `
Amount Received on Leave Encashment 4,30,000
Less: Exemption u/s 10(10AA) Least of the followings:

(I) Actual amount of Leave encashment received 4,30,000
(ii) Average salary of the individual for the past 10 months × 10 months 1,50,000
(iii) Maximum Limit 3,00,000
(iv) Leave at cr. at the rate of 30 days p.a. for every Completed year of
service as calculated in Step (ii) 2,2,000 1,50,000
Taxable Leave Encashment 2,80,000
RETRENCHMENT COMPENSATION
Illustration 11.
Mr. Fleming was retrenched from service of “GO SLOW Ltd”. Retrenchment
compensation received `6, 00,000. Amount determined under the Industrial Disputes
Act, 1948 `4, 75,000. What is the taxability?
Solution:
Computation of Taxable Retrenchment Compensation
Particulars ` `
Amount received as Retrenchment Compensation 6,00,000

86
Less: Exemption u/s 10(10B): Least of the followings:

(ii) Amount determined under the Industrial 4,75,000
Disputes Act, 1948

Taxable Retrenchment Compensation 1,25,000

87
VOLUNTARY RETIREMENT COMPENSATION
Illustration 12.
Mr. Hitesh, after serving Z Ltd. for 23 years 7 months, opted the Voluntary
Retirement Scheme. Total tenure of service: 30 years Compensation received ` 8,
00,000. Last drawn Salary (i.e. Basic pay + D.A, forming part of retirement benefits) `
15,000.
Compute exemption & taxable value of VRS compensation.
Solution:
Computation of Exemption:
Total tenure of service = 30 × 12=360 months

Actual length of service = 23 years 7 months = 283 months
No. of months of service left= (360 – 283) months = 77 months
Taxable VRS compensation
Particulars ` `
Amount received as VRS Compensation 8,00,000
Less: Exemption u/s 10(10C): Least of the followings:

(ii) Maximum Limit 5,00,000
(iii) The highest of the following:

Last drawn salary x 3 x No. of fully completed years of service
=15,000 x 3 x 23= 10,35,000
• Last drawn salary x Balance of no. of months of service left. 11,55,000
= 15,000 x 77 months= 11,55,000 5,00,000
Taxable VRS Compensation 3,00,000
ST. GONSALO GARCIA COLLEGE

88
DEDUCTIONS AGAINST SALARY

Illustration 13.
Ms. Neha is a Senior Accountant in the Ministry of Defense, Govt. of India. She
received entertainment allowance `5,000 p.m. Her basic salary is `35,000 p.m.
Professional tax paid `5,000. Compute Income from Salary.
Basic Salary: 35,000 x 12 =

4,20,000
Entertainment Allowance: 5,000 x 12 =
60,000
Gross Income from Salary 4,80,000
Less: Deduction u/s 16(ii): Entertainment allowance:
Least of the following will be allowed as a deduction:
(I) Actual amount of
entertainment allowance received 60,000
(ii) 20% of Basic salary of the Individual
[20% of 4,20,000] 84,000
(iii) Statutory limit: 5,000
Exempted amount being the least 5,000
Less: Professional Tax paid u/s 16(iii) 5,000
Income from Salary 4,70,000

89
5 Conclusion:
The taxation of income received from salaries is not just a concept to learn
only but practically it put lots of challenges in front of tax return prepares so as to
ensure that correct provision are applied while computing the net salary income
Income from salary seems to be a very small portion but it contains lots of provisions
to study of which is must before practically applying it.
Salaried people have to incur certain expenses for performing their duty for which
standard deduction was given to them till the A.Y. 2005-06. However, the Finance
Act 2006 abolished the standard deduction on the grounds of raising the exemption
limit as well as broadening of slabs of income for rate purpose
1.8 Limitations of the Study Since personal income taxation is a very sensitive
matter, people generally were reluctant to disclose information relating to their
savings, investments and tax planning measures adopted for the period under study.
Hence, more time and effort had to put to collect the data. Secondary data for the
study was collected mainly from the reports of Comptroller and Auditor General
(Union Taxes), annual reports of All India Income Tax Statistics, Reserve Bank of
India Bulletin and circulars and notifications of Central Board of Direct Taxes. Often
there were discrepancies in the data available from various sources. The current
statistics relating to some of the aspects of direct tax administration is still lacking. In
spite of the above limitations, all efforts were made to ensure correctness in the data
collection.

90
5.2 REFERENCES
Weblography:
1 .taxguru.com
2 .salarieschapter4.in
3 .investopedia.com
4.deductionfrom salary.com

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A PROJECT ON:

“STUDY ON INCOME UNDER THE HEAD SALARY”

UNDER THE GUIDE:

PROF. TUSHAR RAUT

ST.GONSALO GARCIA COLLEGE OF ARTS AND COMMERCE

ACADEMIC YEAR – 2018-19

“STUDY ON INCOME UNDER THE HEAD SALARY”

UNDER THE GUIDE:

PROF. TUSHAR RAUT

ST.GONSALO GARCIA COLLEGE OF ARTS AND COMMERCE

VASAI, PALGHAR- 401202

ACADEMIC YEAR – 2018-19

______________ ______ _____________

(DR. SOMNATH VIBHUTE) (ASS. PROF. RUBINA D’MELLO)

_______________ _____ _____________

PROJECT GUIDE: EXTERNAL EXAMINER

(PROF. TUSHAR RAUT)

I would like to acknowledge the following as being idealistic channels

I take this opportunity to thank the University of Mumbai for giving me

I would like to thank my principal,“D.R SOMNATH VIBHUTE”for

I would also like to express my sincere gratitude towards my project

I would like to thank my College Library, for having provided various

ST. GONSALO GARCIA COLLEGE.

Sr. No. INDEX Page

ST. GONSALO GARCIA COLLEGE.

ST. GONSALO GARCIA COLLEGE.

1 INTRODUCTION TO THE PROJECT

A salary is a form of payment from an employer to an employee, which may be

Salary is a fixed amount of money or compensation paid to an employee by an

To understand various retirement benefit like pension and gratuity retrenchment

ST. GONSALO GARCIA COLLEGE.

First paid salary

ST. GONSALO GARCIA COLLEGE.

Roman empire and medieval and pre-industrial Europe

ST. GONSALO GARCIA COLLEGE.

Second Industrial Revolution

Salary and other forms of payment today

ST. GONSALO GARCIA COLLEGE.

ST. GONSALO GARCIA COLLEGE.

In Italy, the Constitution guarantees a minimum wage, as stated in Article 36,

This constitutional guarantee is implemented not through a specific legislation, but

ST. GONSALO GARCIA COLLEGE.

2. RESERCH AND METHODOLOGY

1. To review the tax reforms being introduced by the Government in

2. To assess the efficiency of the administrative machinery for collection

of income tax and management of taxation matters as per the Income

3. To understand and evaluate the tax planning measures being adopted by

the salaried class of the State.

4. To assess whether there is significant differences in the tax planning

measures adopted by different segments of the salaried class of the

State, based on level of income and type of organisation.

5. To ascertain the level of awareness of the salaried class on various tax

planning measures available under the Income Tax Act.

6. To analyse the impact of tax planning on savings habits and investment

pattern of the assessees belonging to the salaried class.

2.2 Scope of the Study

investment pattern, repayment of liabilities, tax planning measures adopted for

tax planning measures were studied and evaluated.

ST. GONSALO GARCIA COLLEGE.

Direct Tax Laws Committee (1978) was appointed by the Government

committee (also known as Choksi Committee) was directed to recommend

in administration. Committee observed that frequent amendments in tax laws led

committee made following suggestion in its final report:

_

_____________ _ ___________