Salaries

Study Note - 4
INCOME FROM SALARIES

This Study Note includes
4.1 Introduction
. eanin of Salary
4.3 Allowances
. eat Cum etirement Benefits
. Profits in lieu of salary Section
4.6 Deductions against salary
. aluation Taxability of Per uisites
4.8 Provident Funds
. Salary under different circumstances at a lance
. Tax on Salary of Non esident Tec nicians Section
. elief under section
4.1 INTRODUCTION
Any person employed gets compensated by way of remuneration for services rendered. This is called
Salary . It is received in cash or in kind by way of amenities, benefits, per uisites. hich emoluments
are salary how to value per uisites and what deductions are available from salary has been dealt with
under this head of income. Certain tax-free items of remuneration have been enumerated under section
10 and are discussed in this chapter.
4.2 MEANING OF SALARY
The meaning of the term salary for purposes of Income tax is much wider than what is normally understood.
Every payment made by an employer to his employee for service rendered would be chargeable to tax
as income from salaries. The term salary for the purposes of Income Tax Act will include both monetary
payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g.
housing accommodation, medical facility, interest free loans etc).
(1) Employer-employee relationship:
Before an income can become chargeable under the head salaries, it is vital that there should exist
between the payer and the payee, the relationship of an employer and an employee.
(2) Full-time or Part time employment:
It does not matter whether the employee is a fulltime employee or a part-time one. Once the relationship
of employer and employee exists, the income is to be charged under the head Salaries. If, for example,
an employee works with more than one employer, salaries received from all the employers should be
clubbed and brought to charge for the relevant Previous Years.
(3) ore oin or sacrificin of salary:
Once salary accrues, the subse uent waiver by the employee does not absolve him from liability to
Income- tax. Such waiver is only an application and hence chargeable.
DIRECT TAXATION I 4.1
Income from Salaries

Surrender of salary:
However, if an employee surrenders his salary to the Central Government u/s 2 of the Voluntary Surrender of
Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered would be exempt while computing
his taxable income.
(5) Salary paid tax free:
This, in other words, means that the employer bears the burden of the tax on the salary of the employee.
In such a case, the income from salaries in the hands of the employee will consist of his salary income and
also the tax on this salary paid by the employer. This means both the salary and the tax paid thereon will
be taxable in the hands of the employee.
6 oluntary Payments:
hether the payment from an employer is based on a contract or not, it constitutes salary in the hands
of the employee. However, many employers give personal gifts and testimonials to the employees. For
example, employees who complete 20 years of service may be given a wrist watch. The uestion arises
whether the value of the watch can be taxed in the hands of the employee. Courts have taken the
view that such gifts are not taxable. However, in these cases it is important that such gifts must be given
to employees pursuant to a scheme applicable to employees in general. If gifts are given purely on a
selective basis they will become chargeable in the hands of the recipient.
C ar eability of Salary in t e rele ant Pre ious ear : Sec.
(1) Due or receipt whichever falls earlier: Salary is taxable on due basis or on receipt basis, whichever is
earlier.
Hence,
(a) Salary due in a Previous Year is taxable, even if it not received.
(b) Salary received in a Previous Year is taxable, even if it is not due.
(c) Arrears of salary received during the current Previous Year shall be taxable in the current year if
not charged to tax in an earlier Previous Year.
(2) No double taxation: once salary is taxed on due/receipt basis, it will not be taxed again on receipt/
falling due, as the case may be.
(3) The assessee can claim relief u/s 89(1) for arrears or advance salary.
(4) Loan from employer is not salary. Advance salary is taxable, while advance against salary is not
taxable.
(5) For Government employees, the period of chargeability of salary is from March to February. For
example, salary from 1st March 2014 to 28th February 2015 is chargeable as Income of the Assessment
Year 2015-16.
Place of accrual of Salary
(1) The place of accrual of salary is the place of employment.
(2) Service rendered in India: U/s 9(1)(ii), salary earned in India is deemed to accrue or arise in India even
if
(a) it is paid outside India,
(b) it is paid or payable after the contract of employment in India comes to an end.
(3) If an employee gets pension paid abroad in respect of services in India, the same will be deemed to
accrue or arise in India.
4.2 I DIRECT TAXATION
(4) Leave salary paid abroad in respect of leave earned in India is deemed to accrue or arise in India.
(5) Services rendered outside India: Sec. 9(1)(iii) provides that income chargeable under the head
Salaries payable by the Government to a citizen of India for service provided outside India will be
deemed to accrue or arise in India.
(6)
s10(7), any allowance or per uisites paid or allowed outside India by the Government to a citi en
of India for rendering services outside India will be fully exempted.
Place of accrual of Salary at a lance:

Received / Earned in India
Deemed to be earned in
India
Taxable in the hands of all persons /assessees whether resident or nonresident in India.
The same would be taxable provided :
1. The services are rendered in India.
2. The leave period preceding / succeeding the tenure of services
rendered in India & forms part of the contract of service.
efinition of Salary u s
In accordance with the provisions of Sec. 17(1) of Income Tax Act,1961, the term Salary includes:

ages
Any annuity or pension
Any gratuity
Any fees, commission, per uisite or profits in lieu of or in addition to any salary or wages
Any advance salary
Encashment of leave-not-availed
Interest earned in excess of 9.5% on Recognized Provident Fund (RPF)
Amount transferred in excess of 12% of Salary to RPF
Contribution made by Central Government or any other employer (w.e.f. A.Y. 2008-09) in the Previous
Year to the account of an employee under Pension Scheme u/s 80CCD
Money embezzled by an employee constitutes his income.
tem ise applicability of Salary :

hile deciding on the issue of applicability of taxable salary, the following matrix would be of immense
help:
Particulars
ages for orkers
Salary received by a
partner of a firm
Director Fees
Salary received by a
proprietor
Director Remuneration
Treatment
The same would be treated as Salary and would be taxable accordingly.
There arises no difference between wages & salary
Such remuneration would be treated as Business Income since the partner
is not an employee of the entity
Sitting fees paid to directors for attending Board Meeting is not a salary but
taxable as Other Income
Proprietor is not an employee and hence any amount received by him would
not be treated as salary
Any amount payable to any whole time directors who are also an employee
of the company would be treated as salary.
In any other case, the same would be treated as Other Income

Pension to retired
employee
Pension to legal heir
of the deceased
employee
Remuneration paid
to teacher of any
University / College
Voluntary Retirement
payment by employer
to employees
Remuneration to the
MP / MLA
Pension is paid in pursuance to the terms of employment. Hence any amount

received as pension would be considered as Salary in the hand of the
recipient
Amount received by legal heir of the deceased employee, who is not an
employee of the organization, would be considered as Income from Other
Sources and not as Income from Salary
Any such remuneration would be treated as Salary if the terms of
employment provide a condition for checking such any paper. However, in
any other case, such income shall be considered as Other Income
Since the employee would get the amount in accordance with the terms of
employment obligation, the same would be considered as Salary
Such income shall be considered as Income from Other Sources as there
exist no employer / employee relationship
ully taxable components of Salary :

1. Basic Salary
10. Fees
2. Dearness Allowance
11. Lunch Tiffin Allowance
3. Advance Salary
12. Overtime Allowance
4. Arrears of Salary
13. Servant Allowance
5. City Compensatory Allowance
14. arden Allowance
6. Bonus
15. Non-practicing Allowance
7. Commission as a percentage on turnover
16. Family Allowance
8. Fixed Medical Allowance
17. Leave encashment during service
9. Project Allowance
18. Holiday Allowance
Profits in ieu of Salary u s

(1)
Compensation due or received from present/former employer in connection with

(a)
termination of employment, or
(b)
modification of terms and conditions of employment.
(2)
Any amount received from an Unrecognized Provident Fund, to the extent of Employers contributions,
along with interest on such contribution.
(3)
Sum received under Keyman Insurance Policy, including Bonus on it.
(4)
Any sum received (either in lump sum or otherwise), either prior to employment or after cessation of
employment.
Specified mployee
An Individual will be considered as a Specified Employee if
(1) He is a director of a company, or
(2)
e holds 20 or more of e uity voting power in the company,
(3) Monetary salary in excess of ` 50,000: His income under the head salaries, (from any employer icluding
a company) excluding non-monetary payments exceeds ` 50,000. For the above purpose, salary,
should be arrived at after making the following deductions:
(a) Entertainment Allowance
(b) Professional Tax
4.3 ALLOWANCES
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 specific exemption has been provided in respect of any
such allowance.
. . Taxability of llo ances
Allowances received by an employee may be classified as follows
. ully taxable allo ances it out any exemptions:

8. Lunch Tiffin Allowance
2. Dearness Allowance / Pay
9. Overtime Allowance
3. Fixed Medical Allowance
10. Servant Allowance
11. arden Allowance
5. Deputation Allowance
12. Non-practicing Allowance
6. Family Allowance
13. Leave encashment during service
7.
14. Holiday Allowance
Project Allowance
. Specific allo ances t at are fully exempt in t e ands of employees

Allowance
Conditions to claim full exemption
1. Travelling Allowance
Should be provided by the employer and spent by the employee to

meet the cost of official tour or transfer expenses. Cost of travel or
transfer includes payments for transfer, packing and transportation of
personal effects.

2. Daily Allowance
Should be spent by the employee for meeting the daily charges

incurred on a tour or transfer.
3. Conveyance Allowance
Should be used by the employee to meet the expenditure on

conveyance in performance of official duties.
4. Helper Allowance
Should be used by an employee to meet the expenditure on a helper

who assists him in the performance of official duties.
5. Academic Allowance
Should be used by the employee for his academic research and

training pursuits.
6. Uniform Allowance
Should be spent by the employee for purchasing maintaining office

uniform for official duties.
7. Allowances and perks paid Fully exempted

by Government of India to
an Indian citizen outside
India
Example: During the Previous Year 2014-15, the following allowances are given to X by the employer
company
mount of
Allowance
(`)
Amount actually
spent for t e
purpose (`)
Amount
c ar eable to
tax
(`)
Travelling allowance for official purpose
36,000
32,000
4,000
Travelling allowance given at the time of transfer

of X from Delhi to Ajmer
40,000
41,000
Conveyance allowance for official purposes
50,000
42,000
Helper allowances for engaging helper for

official purpose
68,000
64,000
1,00,000
90,000
10,000
18,000
17,000
1,000
Nature of llo ance
Research allowance
niform allowance for official purposes
.
Nil
8,000
4,000
en xemption does not depend upon xpenditure
In the case given below, the amount of exemption does not depend upon expenditure incurred by the
employee. Regardless of the amount of expenditure, the allowances given below are exempt to the
extent of (a) the amount of allowance or (b) the amount specified in rule 2BB, whichever is lower.
On the above basis, exemption is available in the case of the following allowances. It may be noted that
in these cases, the amount of actual expenditure is not taken into consideration:Allowance
Nature of llo ance
Special
Compensatory
(Hill Areas) Allowance
It
includes
any
special
compensatory allowance in the
nature of special compensatory
(hilly areas) allowance or high
altitude allowance or uncongenial
climate allowance or snow bound
area allowance or avalanche
allowance.
xemption as specified in ule BB

Amount exempt from tax varies from
` 300 per month to ` 7,000 per month.
Border Area Allowance
It
includes
any
special The amount of exemption varies from
compensatory allowance in the ` 200 per month to ` 1,300 per month
nature of border area allowance
or remote locality allowance or
difficult area allowance or disturbed
area allowance
Tribal Areas/ Scheduled

Areas Allowance
Tribal areas allowance is given in (a) ` 200 per month

Madhya Pradesh; (b) Tamil Nadu;
(c) Uttar Pradesh; (d) Karnataka; (e)
Tripura (f) Assam (g) est Bengal
(h) Bihar; (i) Odisha.
Allowance for Transport

Employees
It is an allowance granted to an
employee working in any transport
system to meet his personal
expenditure
during
his
duty
performed in the course of running
of such transport from one place to
another place provided that such
employee is not in receipt of daily
allowance
The amount of exemption is :(i) 70 % of such allowance; or

(ii) ` 10,000 per month,
whichever is lower.
Children
Allowance
Education
This allowance is given for Childrens

education.
The amount exempt is limited to

` 100 per month per child up to a
maximum of two children.
Hostel
Allowance
Expenditure
This amount is granted to an

employee to meet the hostel
expenditure on his child.
It is exempt from tax to the extent

of ` 300 per month per child up to a
maximum of two children.
Compensatory Field Area

Allowance
If this exemption is taken, the

same employee cannot claim any
exemption in respect of border
area allowance mentioned above.
Exemption is limited to ` 2,600 per

month in some cases.
Transport Allowance
Transport allowance is granted to an

employee to meet his expenditure
for the purpose of commuting
between the place of his residence
and the place of his duty.
It is exempt up to ` 800 per month.

For handicapped person, exemption
upto ` 1,600 per month.
Underground Allowance
Underground allowance is granted

to an employee who is working in
uncongenial, unnatural climate in
underground mines.
Exemption is limited to ` 800 per

month.
High Altitude Allowance
It is granted to the member of

armed forces operating in high
altitude areas.
It is exempt from tax up to ` 1,060 per

month (for altitude of 9,000 to 15,000
feet) or ` 1,600 per month

Example:- The following example are given to have better understanding:
(i) During the Assessment Year 2015-16, the following allowances are given to A by the employercompany
mount of
Amount spent
allowance
(`)
(`)
Nature of allo ance
mount of
exemption
(`)
Amount
c ar eable to
tax
(`)
Tribunal area allowance for As posting

in Assam for two months
3,000
Not relevant
200 p.m.
600
Child education allowance for As elder

son
1,800
Not relevant
100 p.m.
600
Child education allowance for As

younger son
900
Not relevant
900
Child education allowance for As

daughter
1,080
Not relevant
100 p.m.
Nil
Hostel expenditure allowance for As

elder son
6,600
Not relevant
300 p.m.
3,000
12,000
Not relevant
800 p.m.
2,400
Transport allowance for commuting

between office and residence
(ii) The following allowances are given by a transport company to its drivers to meet personal expenditure
in the course of running truck from one place to another place :Name of
drivers
mount of
allowance
(`)
Amount spent (`)
Amount not
c ar eable to tax
(`)
Amount
c ar eable to tax
(`)
72,000
Not relevant
70% of ` 72,000
7,20,000
Not relevant
` 10,000 per month
6,00,000
21,600
1,30,000
Not relevant
` 10,000 per month
10,000
46,200
Not relevant
70% of ` 46,200
13,860
C is in employment only for 2 months during the Previous Year 2014-15; D is in employment only for 7 months
during the Previous Year 2014-15.
. . arious items of salary for
ic exemptions are a ailable sub ect to limitations:
u s
SS ST NC T
ule B
Conditions for claimin t e benefit:

(a) An individual can avail the benefit of LTA offered by his employer, twice in a block of four years.
(b) The present block of four years applicable for A.Y. 2015-16 is calendar years 2013-2016.
(c) LTA may be provided by the employer to the employee and his family:
(i) In connection with his proceeding on leave to any place in India, while in service;
(ii) Proceeding to any place in India after retirement or termination from service.
en Taxable:

LTA encashed without performing journey is fully taxable
Expenses reimbursed other than the fare like boarding or lodging is fully taxable.
Amount received from employer in excess of the cost of traveling on the shortest route.
amily of an ndi idual means:

Spouse and children of the individual, and
Parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the
individual.
B.
NT
NC Sec.
ule
Conditions for claimin exemption:

Assessee is in receipt of HRA
Pays Rent
Rent paid is more than 10% of salary
Very Important:

The exemption shall be calculated on the basis of where the accommodation is situated.
If the place of employment is the same for the whole year, then exemption shall be calculated for
the whole year.
If there is a change in place during the Previous Year, then it will be calculated on a monthly basis.
Exemption should be calculated in respect of the period during which rental accommodation is
occupied by the employee during the Previous Year.
Salary for the period during which rental accommodation is not occupied shall not be considered.
Salary for
Basic Pay DA (considered for retirement benefits) Commission (if received as a fixed
percentage on turnover as per terms of employment)
Computation of Taxable ouse ent llo ance
Particulars
Amount received during the financial year for RA

Less: Exemption u/s 10(13A) Rule 2A:
Least of the followings:
(a) Actual amount received
(b) 50% ( for metro cities) / 40 % ( for non-metro cities) of Salary
(c) Rent paid less 10 % of Salary
Taxable
`
xxx
xxx
xxx
xxx
xxx
xxx

4.4 DEATH-CUM-RETIREMENT BENEFITS
.
Gratuity u s
or Non Go ernment mployee Co ered by Payment of Gratuity ct,

Computation of Taxable Gratuity
Particulars
`
xxxx
Amount received as Gratuity

Less: Exemption u/s 10(10)(ii)
(i) Actual amount received
(ii) 15/26 x Last drawn salary x No. of years of completed service or part
thereof in excess of 6 months
(iii) Maximum limit
xxx
xxx
10,00,000
Taxable Gratuity
xxxx
xxxx
Note: Salary = Basic Pay + Dearness Allowance

In case of seasonal employment, instead of 15 days, 7 days shall be considered.
or Non Go ernment mployee Not co ered by Payment of Gratuity ct,
Computation of Taxable Gratuity
Particulars
Amount received as Gratuity

Less: Exemption u/s 10(10)(iii)
(i)
Actual amount received
(ii)
x Average Salary x No. of fully completed years of service
(iii) Maximum limit
Taxable Gratuity
`
xxxx
xxx
xxx
10,00,000
xxxx
xxxx
Note: Salary = 10 months average salary preceeding the month of retirement.

Basic Pay Dearness Allowance considered for retirement benefits Commission (if received as a fixed
percentage on turnover)
Gratuity received while in service:Any gratuity paid to an employee while he continues to remain in service (whether or not after he has
put in minimum specified period of service) is not exempt from tax. Tax exemption will be available only
if gratuity is paid on (i) retirement; (ii) becoming incapacitated prior to such retirement; (iii) termination
of employment; (iv) resignation; or (v) death. Gratuity received under other circumstances would not be
exempt from tax, though the assessee can claim relief under section 89.
Very Important:

here an individual receives retirement gratuity from more than one employer, he can claim
exemption in respect of both of them.
However, the maximum amount of exemption should not exceed ` 10,00,000.
hen gratuity is received from more than one employer during different periods of time, the maximum
exemption claimed by an assessee during his entire life should not exceed ` 10,00,000.
Gratuity recei ed by family members after t e deat of t e employee:

If gratuity is paid after the death of an employee, then the case may fall in one of the following situations
given below:Normal date of
retirement of employee
(say A)
hen gratuity
become due
Date of payment
of gratuity
Date of death
of A
Situation 1
June 30, 2014
June 30, 2014
July 11, 2014
July 20, 2014
Situation 2
June 30, 2014
June 30, 2014
July 11, 2014
July 6, 2014
Situation 3
June 30, 2014
July 6, 2014
July 11, 2014
July 6, 2014
Situation 1 - The gratuity become due (and paid) during the lifetime of X, it is taxable in the hand of X. He
can claim exemption under section 10(10).
Situation 2 - Gratuity becomes due on June 30, 2014 at the time of retirement. It is taxable in the hand of A
even if it is received by legal heirs on July 11, 2014 after his death. After claiming exemption under section
10(10) (ii)/(iii), the balance shall be included in the salary income of X. Income-tax return shall be submitted
by Mrs. A(or her children) as legal heirs of A.
Situation 3 - A dies on July 6, 2014 while in service. Gratuity is sanctioned after his death on July 6, 2014. It
cannot be taxed in the hands of deceased employee X as it becomes due and is paid after his death.
This amount is not taxable in the hands of legal heirs also as it does not partake the character of income
in their hands but is only a part of the estate devolving upon them.
B. Pension
Tax treatment of pension in different cases:

Different situations
Tax treatment
Case -1
Pension is received from UNO by the

employee or his family members
It is not chargeable to tax
Case -2
Family pension received by the family

members of armed forces (after the
death of employee)
It is exempt under section 10(19) after fulfilling of

certain condition.
Case -3
Family pension received by family

members in other cases (after the death
of employee)
It is taxable in the hand of recipients under section

56 under the head "Income from Other Sources.
Standard deduction is available under section 57
which is 1/3 of such pension or ` 15,000, whichever
is lower.
. Taxability of ncommuted Pension or ont ly Pension:

(a) Pension is received periodically by the retired employee
(b) It may be received by Government or non-government employees
(c) Amount received shall be fully taxable under the head Salaries
. Taxability of Commuted Pension:
(a) Pension is received in lumpsum as per the terms of the employment on retirement or superannuation.
(b) Full Value of Commuted Pension = Amount received on commutation/percentage of commutation.
(c) Taxability:
Recipient
mount Taxable
Government employee(Central/State/Local Authority

or Statutory Corporation)
Fully exempted u/s 10(10A)(i)
Non-Govt. employee who has also received Gratuity

u/s 10(10A)(ii)
Amount Received
Less: 1/3 of Full Value of Commuted Pension
Non-Govt. employee who has not received Gratuity

u/s 10(10A)(iii)
Amount Received
Less:1/2 of Full Value of Commuted Pension
In accordance with the aforesaid rules, pension is chargeable to tax on "accrual" basis whether it is
received voluntarily or under a contract. Arrears of pension are also assessable on "due" basis whether
paid or not. In respect of the arrear pension which is not exempt from tax, the assessee can, however,
claim relief under section 89.
Notified Pension Sc eme These provisions are given below:(i) Contribution by Central Government or any other employer to the otified Pension Scheme ( PS) is first
included under the head Salaries in hand of employee.
(ii) Such contribution is deductible (to the extent of 10 percent of the salary of the employee) under
section 80CCD.
(iii) Employees contribution to the otified Pension Scheme ( PS) (to the extent of 10 percent of the salary
of the employee) is also deductible under section 80CCD.
(iv)
hen pension is received out of the aforesaid amount, it will be chargeable to tax in the hand of the
recipient.
(v) The aggregate amount of deduction under section 80C, 80CCC and 80CCD cannot exceed ` 1,00,000.
(vi) Salary for the purpose of point (ii) & (iii) includes basic salary and dearness allowance (if the term of
employment so provided) but excluded all other allowances and per uisites.
C. Leave Encashment
1. Leave encashment while in service is fully taxable as income of Previous Year in which it is encashed.
2. Leave encashment on retirement:
(a) If an individual receives leave encashment on his retirement, then the amount received will be
eligible for exemption.
(b) The amount of exemption is based on his employment:
(i) Government employee: fully exempted from tax
(ii) Non-Govt. employee: An individual who is not a Government employee is also entitled for
exemption in respect of leave encashment compensation received by him.

. Computation of exemption from ea e ncas ment:
Step 1:
Computation of Salary = 10 months average salary preceding the month of retirement.
Step 2:
Salary Basic Pay Dearness Allowance (forming a part of salary for retirement benefits)
Commission (if received as a fixed percentage on turnover)
Step 3:
This calculation is only applicable where the employer has sanctioned leave to the employee in
excess of 30 days for every completed year of service.
Particulars
No. of ays
(i) Leave credit available on the date of retirement
xxx
Less: Excess leave sanctioned by the employer

(Leave sanctioned by the employer per year leave @ 30 days per year) x No. of
completed years of service
Leave credit on the basis of 30 days credit for completed years of service
(xxx)
xxx
(ii) Leave salary on the basis of 30 days credit = Step 3(i) Step 1 (Amount in `)
` xxxx
Note: In case the employer sanctioned leave of 30 days or less for completed year of service then the
salary for actual leave balance shall be considered and Step 3(i) shall not apply.
. Computation of Taxable ea e Salary ncas ment on etirement:
Particulars
Amount (`)
Amount received on Leave Salary/Encashment

Less: Exemption u/s 10(10AA):
(i)
Actual amount of leave encashment received
(ii) Average salary of the individual x 10 months
(iii) Maximum limit
(iv) Leave credit ( as per computation stated in 3 above)
Amount (`)
xxxx
xxxx
xxxx
3,00,000
xxxx
Taxable Value of Leave Salary/Encashment
xxxx
Note:
(a) If the individual receives leave encashment from more than one employer, the uantum of exemption
will be computed independently in respect of each employer.
(b) The total amount of exemption should not exceed ` 3,00,000 during his life time.
. etrenc ment Compensation Sec.
Compensation is recei ed by a or man at t e time of:

(i) Closing down of the undertaking.
(ii) Transfer (irrespective of by agreement compulsory ac uisition) if the following conditions are
satisfied
!
Service of workmen interrupted by transfer
Terms and conditions of employment after transfer are less favourable
New employer is not under a legal obligation whether under the terms of transfer or otherwise to
pay compensation on the basis that the employees service has been continuous and has not
been interrupted by transfer.
Note:
(a) Retrenchment compensation received in accordance with any scheme, which is approved by the
Central Government, is fully exempt from tax.
(b) An individual who receives retrenchment compensation is entitled for exemption u/s 10(10B).
Computation of Taxable etrenc ment Compensation
Particulars
Amount (`)
Amount received as Retrenchment Compensation

Less: Exemption u/s 10(10B):
(ii) Amount determined under the Industrial Disputes Act,1947
(iii) Maximum Limit
Taxable amount of etrenc ment Compensation
. oluntary etirement Compensation u s
Amount (`)
xxxx
xxxx
xxxx
5,00,000
xxxx
xxxx
Conditions for claimin exemption:

(i)
An individual, who has retired under the Voluntary Retirement Scheme, should not be employed in
another company of the same management.
(ii)
He should not have received any other Voluntary Retirement Compensation before from any other
employer and claimed exemption.
(iii) Exemption u/s 10(10C) in respect of Compensation under VRS can be availed by an Individual only
once in his lifetime.

Computation of xemption:
Step 1 Salary Last drawn salary Basic Pay D.A. (considered for retirement benefits)
Step 2:
Computation of Taxable VRS compensation

Particulars
Amount received as VRS Compensation

Less: Exemption u/s 10(10C):
(ii) Maximum Limit
(iii) The highest of the followings :
(a) Last drawn salary x 3 x No. of fully completed years of service xxxx
(b) Last drawn salary x Balance no. of months of service left
xxxx
Amount
(`)
xxxx
xxxx
5,00,000
xxxx
Taxable amount of etrenc ment Compensation

. P
TS N
S CT
Amount
(`)
xxxx
xxxx
These payments are made to an employee in lien of salary even if these payments have no connection
with the Profits of the employer. These are the followings a Compensation for loss of employment or modification of t e employment terms Compensation for loss
of employment or modification of terms of employment is generally treated as a capital receipt. But
by virtue of section 17(3)(i), 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 modification of terms
of employment is taxable as profit in lieu of salary. It is taxable on due or receipt basis, whichever
come earlier. The recipient may claim exemption under section 10(10B) or 10(10C).
The silent features are:(i) Compensation is received by an assessee from his employer or former employer;
(ii) It is received at or in connection with termination of his employment or modification of terms and
conditions relating thereto.
b Payment from unreco ni ed pro ident or superannuation fund Accumulated balance in any
provident fund/superannuation fund of employers portion consists of the following:(i) Employers contribution;
(ii) Interest on employers contribution is taxable subject to the following propositions
(1) The provident fund/ superannuation fund is an unapproved fund;
(2) These are taxable at the time of payment to the assessee
(c) Payment from Keyman insurance policy- Any sum received under Keyman insurance policy (including
the sum allocated by way of bonus on such policy) is taxable as policy in lieu of salary.
(d) Profits in lieu of salary will include amount received in lump sum or otherwise, prior to employment or
after cessation of employment for the purpose of taxation.
(e) Any other payment due to or received [excluding Sec. 10(10A) /10(10B) /10(11) /10(12) / 10(13) /
10(13A)] by an assessee from his employer or former employer is treated as Profit in Lieu in Salary .
4.6 DEDUCTIONS AGAINST SALARY

1. Entertainment Allowance:
pplicable only for Go ernment mployees Sec. 6 ii
Least of the following will be allowed as a deduction:

(i) Actual amount of entertainment allowance received;
(ii) 20% of basic salary of the individual
(iii) ` 5,000
. Professional Tax Sec. 6 iii
(i) Professional tax or tax on employment paid by an employee, levied under a State Act shall be
allowed as deduction ;
(ii) such deduction is available only on actual payment;
(iii) If an employer pays professional tax on behalf of his employee, then it will first be included in the
Salary as a per uisite and then, allowed as a deduction.
.
N T
ST S
Per uisite: A per uisite is defined in the Oxford English Dictionary as any casual emolument, fee or profit,
attached to an office or position in addition to the salary or wages. Per uisite has a known normal meaning,
namely, personal advantage. In simple words, per uisites are the benefits in addition to normal salary to
which the employee has a right by virtue of his employment.
The essential feature of a per uisite is that an employee should have a right to the same and that it should
not be a mere voluntary or contingent payment.
Per uisite includes:
(a) Value of rent free accommodation given by the employer
(b) Value of accommodation given at concessional rate
(c) alue of benefit given free of cost or at concessional rate in the following cases
(i) given by employer to his Director Employee;
(ii) given by employer to his employee who owns 20% or more of voting power in the company, and
(iii) given by any employer (including company) to his employees whose monetary salary exceeds
` 50,000
(d) Any sum paid by the employer on behalf of the employees
(e) Sum paid/payable by the employer towards insurance on the life of the individual or annuity
payments
(f)
alue of any other fringe benefit or amenity. [Sec. 17(2)(vi)]

. . Per uisites
ic are fully exempted from Tax
The following per uisites are exempt from tax in all cases and hence not includible for the purpose of tax
deduction at source under section 192:
1. Provision for medical facilities subject to limit
2. Tea or snacks provided during working hours
3. Free meals provided during working hours in a remote area or an offshore installation

4. Per uisites allowed outside India by the Government to a citi en of India for rendering service
outside India.
5. Sum payable by an employer through a recognized provident fund or an approved superannuation
or deposit-linked insurance fund established under the Coal Mines Provident Fund or the Employees
Provident Fund.
6. Employers contribution to staff group insurance scheme.
7. Leave travel concession subject to Sec. 10(5)
8. Payment of annual premium by employer on personal accident policy affected by him on his
employee
9. Free educational facility provided in an institute owned/maintained by employer to children of
employee provided cost/value does not exceed ` 1,000 per month per child (no limit on no. of
children)
10. Interest-free/concessional loan of an amount not exceeding ` 20,000
11. Computer laptop given (not transferred) to an employee for official personal use.
12. Transfer without consideration to an employee of a movable asset (other than computer, electronic
items or car) by the employer after using it for a period of 10 years or more.
13. Traveling facility to employees of railways or airlines.
14. Rent-free furnished residence (including maintenance thereof) provided to an Official of Parliament,
a Union Minister or a Leader of Opposition in Parliament.
15. Conveyance facility provided to High Court Judges u/s 22B of the High Court Judges (Conditions of
Service) Act, 1954 and Supreme Court Judges u/s 23A of the Supreme Court Judges (Conditions of
Service) Act, 1958.
16. Conveyance facility provided to an employee to cover the ourney between office and residence.
17. Accommodation provided in a remote area to an employee working at a mining site or an onshore
oil exploration site, or a project execution site or an accommodation provided in an offshore site of
similar nature.
18. Accommodation provided on transfer of an employee in a hotel for not exceeding 15 days in
aggregate.
19. Interest free loan for medical treatment of the nature given in Rule 3A.
20. Periodicals and ournals re uired for discharge of work.
21. Tax on per uisite paid by employer [Sec. 10(10CC)]
22. Other Exempted Payments:

(a) Bonus paid to a football player after the orld Cup victory to mark an exceptional event
(b) Payment made as a gift in appreciation of the personal ualities of the employee
(c) Payment of proceeds of a benefit cricket match to a great cricket player after he retired from
test match;
(d) Trust for the benefit of employee s children.

. . edical acilities
(a) Fixed medical allowance is fully taxable

(b) Medical payments include reimbursements also [Circular no.603/6.6.1991]
Medical Treatment in India :
1. Local treatment to employee or any member of his family in:
(a) Hospital maintained by employer
(b) Government Hospital

(c) otified hospital for prescribed diseases [Sec.17(2)(v)]

Family includes spouse, children (whether dependent or independent) and parents, brothers and
sisters wholly dependent on the employee.
2. Group Medical insurance paid u/s 36(1)(ib) & Medical Insurance paid u/s 80D- which are approved by
the Central Govt. or IRDA w.e.f. A.Y.2007-08.
3. Any other medical expenditure reimbursed subject to a maximum of ` 15,000.
edical Treatment broad for t e patient and t e attendant :
If the employee underwent medical treatment abroad and the expenditure is met by the employer, the
exemption will be subject to the following:
1. Medical treatment and stay expenses abroad (both for the patient and the attendant) is exempt from
tax, subject to the maximum amount permitted by the Reserve Bank of India.
2. Tra el expenditure of t e patient and t e attendant:
Gross Total ncome, before includin reimbursement of
orei n Tra el xpenditure
mount of xemption
Upto ` 2,00,000
Fully Exempted
Above ` 2,00,000
Fully Taxable
3. Computation of exemption for forei n tra el expenditure

Step 1: Compute Gross Total Income of the assessee without considering foreign travel reimbursement
but after set-off loss and unabsorbed depreciation.
Step 2: If the Gross Total Income does not exceed ` 2 lakhs, Foreign Travel Reimbursement is not taxable
otherwise fully taxable.
Step 3: If Foreign Travel reimbursement is taxable as per Step 2, recomputed the income under the
head Salary after including foreign travel reimbursement and Gross Total Income must also be
recomputed.

. . ccommodation acilities
1. alue of nfurnis ed ccommodation: Explanation 1 to Sec.17(2), Rule 3(1)
ature of Per uisite
Taxable alue of Per uisite
Provided by Central Govt. or State Govt.
Licence fee determined by the Government

Less: Rent recovered from employee
Pro ided by mployer ot er t an Central or State Go ernment

(a) owned by employer
n cities a in population exceedin

2001 census:
15% of Salary
Less Rent actually paid by employee
la
n cities a in population exceedin la

exceedin la s as per
census:
10% of Salary
s as per
s but not
In other places:
7.5% of Salary
(b) taken on lease by the employer
Rent paid by the employer or 15% of Salary whichever

is lower
Less Rent recovered from employee
(c) Accommodation in a hotel
24% of salary paid/payable or actual charges

paid/payable whichever is lower
Less: Amount paid or payable by the employee
Hotel Accommodation: Accommodation provided in a hotel will not be a taxable per uisite if the following
two conditions are fulfilled
(a) The period of such accommodation does not exceed 15 days
(b) Such accommodation has been provided on the transfer of the employees from one place to another.
. alue of urnis ed ccommodation
Particulars
Value of unfurnished accommodation as above
Add : Value of Furniture provided:
If owned by employer, 10 p.a. of original cost of such furniture
`
xxx
xxx
If hired from third party, then Actual hire charges

Less: Any charges paid or payable by the employee
alue of urnis ed ccommodation
(xxx)
xxx
Note: Furniture includes Television sets, radio, refrigerator, other household appliance, air-conditioning
plant or e uipment.
. aluation not applicable:

(a) Employees working at mining site, onshore oil exploration site, offshore site, project execution site,
dam site, power generation site.
(b) Conditions to be fulfilled
(i) The accommodation should be of a temporary nature, and

(ii) Plinth area should not exceed 800 s uare feet

(iii) Accommodation should be located at least 8 kms away from local limits of municipality/
cantonment or located in a remote area
Remote area means area located at least 40 kms away from town having a population not exceeding
20,000 based on latest published All-India census.
. aluation of accommodation in case of mployees on transfer:
(a) For the first 90 days of transfer here accommodation is provided both at existing place of work and
in new place, the accommodation, which has lower value, shall be taxable.
(b) After 90 days: Both accommodations shall be taxable.
. Salary for aluation of ccommodation facilities:
Salary includes
Salary excludes
Basic Salary
D.A. (if considered for retirement benefits)
All taxable allowances
Bonus or commission or ex-gratia
Any other monetary payment
Other D.A
Employers contribution to PF
Exempted allowances
Per uisites u s 17(2)
Per uisites u s 17(2)(iii) or its provisions
. . t er acilities and Per uisites to mployee and is ouse old

Rule
Nature of Per uisite
3(3)
Service of sweeper, gardener or

watchman or personal attendant
3(4)
Supply of gas, electricity or water

for household consumption
3(5)
Education facilities to members of

his household
(a) free education to children
in the school maintained by
the employer or the school
sponsored by the employer
(b) other schools
(c) for other members of the
household
Taxable alue of Per uisite T P

Actual cost to the employer
Less: Amount paid by employee
(i) Procured from outside a ency
Amount paid to outside agency
(ii) esources o ned by employer imself
Manufacturing cost per unit
Less: amount paid by the employee
If the cost of education per child does not exceed
` 1,000 p.m.- then not taxable
or points b c
In other case, cost to the employer
Less: amount recovered from employee

i
Housing Loan/Vehicle Loan- for

ac uiring capital assets and not for
repairs
Other Loans
Interest charged by employer is e ual to or higher
than SBI rates. It is not a taxable per uisite.
Interest charged is lower than SBI rates: Interest
charged at SBI rates on maximum outstanding
balance
SBI Rate= SBI Rate prevailing on the

first day of the Previous ear
Less: Interest paid by the employee on that loan

xceptions :
(a) Medical loan for treatment of diseases specified
in Rule 3A except loan reimbursed by medical
insurance
(b) Loan not exceeding ` 20,000 in aggregate
(vii)
Use of any movable asset other

than computer or laptops or other
assets already mentioned
10% of Actual Cost if owned by the employer;

or
Actual rental charge paid/payable by the employer
Less: Amount recovered from employee
Note: embers of ouse old includes: spouse s , c ildren and t eir spouses, parents, ser ants and
dependents.
. . Transfer of o able ssets to mployees ule
Particulars
iii
Computer
Electronic
Gadgets
Car
50%
20%
10%
Actual Cost
Less : Depreciation for completed years
XXXXX
(XXXXX)
XXXXX
(XXXXX)
XXXXX
(XXXXX)
D at the end of completed years
XXXXX
XXXXX
XXXXX
Less :Sale Value taken from Employee
(XXXXX)
(XXXXX)
(XXXXX)
et od of epreciation
Rate of Depreciation for every completed
year
t er o able
Assets
SLM

Note:
(a) Electronic gadgets include computer, digital diaries and printers, but excludes washing machines,
microwave ovens, hot plates, mixers, ovens, etc.
(b) Transfer of Assets, which are 10 years old, shall not attract tax liability.
(c) Member of household includes: Spouse(s), children and their spouses, parents, servants and
dependents.
(d) Completed year means actual completed year from the date of ac uisition of the asset to the
date of transfer of such asset to the employees.
. .6 Taxability of Per uisites pro ided by mployers

. .6. Taxability of otor Car Benefits
ner of Car
xpenses
borne by
Purpose
1(a) Employer
Employer
Fully official
ot a per uisite provided the documents as specified

in Rule 3(2)(B) are maintained
1(b) Employer
Employer
Fully private
Total of:
(i)
Actual expenditure on car
(ii) Remuneration to Chauffeur
(iii) 10% of the above cost of car
(normal wear & tear)
Less: Amount charged from employee
1(c)(i)
Employer
Employer
Partly official
and partly for
personal use
Cubic capacity of car engine upto 1.6 litres

` 1,800 p.m. + ` 900 p.m. for chauffeur
Cubic capacity of car engine above 1.6 litres
` 2,400 p.m. + ` 900 p.m. for chauffeur
1(c)(ii)
Employer
Employee
Partly for
official and
partly for
personal use
Cubic capacity of car engine upto 1.6 litres

` 600 p.m. + ` 900 p.m. for chauffeur
Cubic capacity of car engine above 1.6 litres
` 900 p.m. + ` 900 p.m. for chauffeur
2(i) Employee
Employer
Fully official
use

2(ii) Employee
Employer
Partly official
and partly
personal
Subject to Rule 3(2)(B)

Actual expenditure incurred
Less: Value of Car cubic capacity upto 1.6 litres
[i.e. value as per 1(c)(i)]
Or
Value of Car cubic capacity above 1.6 litres
[ i.e. value as per 1(c)(i)]
3(i) Employee
owns other
automotive
but not car
Employer
Fully official
use

3(ii) employee
owns other
automotive
but not car
Employer
Partly for
official use
and partly for
personal use
Subject to Rule 3(2)(B)

Actual expenditure incurred by employer
Less: ` 900 p.m.
Note:
1. Using cars from pool of cars owned or hired by Employer:
The employee is permitted to use any or all cars for both official and personal use
For one car
Valued as per 1(c)(i)
For more than one car
Valued as per 1(b) as if fully used for personal purpose
2. Documents to be maintained for claiming non-taxable per uisite or higher deduction wherever
applicable [ Rule 3(2)(B)]:

(a) Employer should maintain complete details of ourney undertaken for official purpose, which
includes date of journey, destination, mileage and amount of expenditure incurred thereon.

(b) Certificate of supervising authority of the employee, wherever applicable, to the effect that
the expenditure incurred for wholly and exclusively for performance of official duties, should be
provided.
. .6. Taxability of ot er benefits
Rule
Nature of Per uisite
Taxable alue of Per uisite T P
3(6)
Transportation of goods or passengers

at free or concessional rate provided by
the employer engaged in that business
(other than railways/airlines)
Value at which offered to public

Less: Amount recovered from the employee
3(7)(ii)
Travelling, touring, accommodation and

other expenses met by the employer
other than specified in Rule 2B (this shall
be calculated only for the period of
vacation)
Amount recovered by employer or value at

which offered to public
3(7)(iii)
Free meals during office hours. Free meal

in remote area or offshore installation
area is not a taxable per uisite
Actual cost to the employer in excess of ` 50 per

meal or tea or snacks
Less: Amount recovered from the employee
Tea or non-alcoholic beverages and snacks
during working hours is not taxable
3(7) (iv)
Value of any gift or voucher or token other

than gifts made in cash or convertible into
money (i.e. gift che ues) on ceremonial
occasion
Value of gift
( In case the aggregate value of gift during the
Previous Year is less than ` 5,000, then it is not a
taxable per uisite)
3(7)(v)
Expenditure incurred on credit card or

add on card including membership fee
and annual fee
Actual expenditure to employer is taxable

(If it is incurred for official purpose and supported
by necessary documents then it is not taxable)
3(7)(vi)
Expenditure on club other than health

club or sports club or similar facilities
provided uniformly to all employees
Actual expenditure incurred by the employer

If the expenditure is incurred exclusively for
official purposes and supported by necessary
documents then it is not taxable.
Initial fee of corporate membership of a club is
not a taxable per uisite
3(7)(ix)
Any other benefit or amenities or service

or right or privilege provided by the
employer other than telephone or mobile
phone
Cost to the employer

Note: Members of household includes spouse/(s), children and their spouses, parents, servants and
dependants
. .6. mployee Stoc ption S P

1.
mployee Stoc ption means any specified Securities or Sweat E uity Shares, allotted or transferred
by the present or former Employer, to the Employee, directly or indirectly, either free of cost or at a
concessional price.
2.
Specified Security means Securities as defined in Securities Contracts (Regulation) Act, 1956 and
where Employees Stock Option has been granted under any plan or scheme, includes securities
offered under suc Plan Sc eme.
3.
S eat uity S ares means E uity Shares issued by a Company to its Employees or Directors, at a
discount or for consideration other than cash, for (a) providing know-how, or (b) making available
intellectual property rights, or (c) value additions, by whatever name called.
4.
alue of t e Security or S eat uity S ares FM of the Security Sweat E uity Shares as on the date
of exercise of Option Minus Amount recovered from the Employee.
5.
6.
air
ar et alue
means the Value determined in the prescribed manner. [See Table below]
Option means a right but not an obli ation granted to an Employee, to apply for the specified Security
or Sweat E uity Shares, at a pre-determined price.
s per ule
C t e air ar et alue s all be determined as under
Particulars
1. S ares of an nlisted Company
2. S ares of a isted Company
(a) Tradin on t e date of estin of option:
Listed in one Recognised Stock Exchange
Listed in more than one Recognised Stock Exchange
air ar et alue
As determined by a Merchant Banker on the specified
date.
Average of Opening and Closing Price on the date of

exercising of option.
Average of Opening and Closing Price in the Stock
Exchange that records the highest olume of tradin in
Shares on the date of exercising of option.
(b) No Tradin on t e date of estin of option:

Listed in one Recognised Stock Exchange
Closing Price of the Share on any Recognised Stock

Exchange on a date closest and immediately preceding
the date of exercising of option.
Listed in more than one Recognised Stock Exchange
Closing Price of the Share on the Stock Exchange on a
date closest and immediately preceding the date of
exercising of option in the Stock Exchange that records
the highest volume of trading in shares.
3.
of specified Security, not bein an uity S are in As determined by a Merchant Banker on the specified
the Company (Rule 40D)
date. Notfn. No.
dt. . .

. .6. Taxability of Per uisites
t a lance
Per uisites
Specified
Employee
Non Specified
Employee
Taxable
Taxable
atchman, gardener, sweeper, personal attendant Taxable

engaged by employee and expenses met by the
employer
Taxable
The aforesaid mentioned servants provided in any other

manner
Taxable
Non-taxable
Gas, electricity, water, etc. for household consumption

and the connection in the name of employee but
expenses paid by the employer
Taxable
Taxable
Above facilities provided in any other manner
Taxable
Non-taxable
Education expenses, if the bills are in the name of

employee, but met by employer
Taxable
Taxable
Above facilities provided in any other manner
Taxable
Non-taxable
Transport facilities provided by transport undertakings,

other than Railways, Airlines
Taxable
Taxable
Interest free loans or loans provided at concessional rates

by the employer to employee
Taxable
Taxable
Holiday home facilities provided
Taxable
Taxable
Club facility provided by employer(other than official Taxable

purposes)
Taxable
Computer/laptop provided by the employer for use by

the employee
Non-taxable
Non-taxable
Other movable assets provided by the employer for use

by the employees
Taxable
Taxable
Sale/transfer of movable assets to employees
Taxable
Taxable
Maga ines, periodicals, ournals, etc. for official work
Not taxable
Not taxable
Medical facilities, if the bills are in the name of employee,

but met by employer above ` 15,000
Taxable
Taxable
Above facility in any other manner
Taxable
Non-taxable
Leave travel concession
Not taxable
subject to 10(5)
Not taxable subject to

Sec.10(5)
Stock option under approved scheme
Not taxable
Not taxable
Rent free/concessional accommodation
. P
NT
Particulars
N S
Statutory
Provident
Fund(SPF)
eco ni ed
Provident Fund
(RPF)
nreco ni ed
Provident Fund
(URPF)
Public Pro ident und

(PPF)
Constituted
under
Provident Funds
Act,1952
EPF and
Miscellaneous
Provisions
Act, 1952 &
recognized by
the Commissioner
of PF and CIT
Not recognized
by the
Commissioner of
Income Tax
Public Provident Fund

Act,1968 Account in
SBI or Post Offices
Contributed by
Employer and
employee
Employer and
employee
Employer and
employee
All assessees
independently
Assessees
contribution
Deduction u/s
80C
Deduction u/s
80C
No Income tax
benefit
Deduction u/s 80C
Employers
Contribution
Not taxable
Amount
exceeding 12% of
salary is taxable
Not taxable
at the time of
contribution
Not applicable
Interest credited
Fully exempted
Exempted upto
9.5% p.a.
Any excess is
taxable
On Employees
Contribution Taxable under
the Head
Income from
Other Sources
Fully exempted
On Employers
contribution not
taxable at the
time of credit
ithdrawal
at the time of
retirement or
resignation or
termination, etc
Exempted u/s 11
Exempted u/s
10(12) subject to
conditions
Employees
contribution and
interest thereon is
not taxable
Exempted u/s 10(11)
Employers
contribution and
interest thereon is
taxable as Profits
in lieu of Salary,
under the head
Salaries
Note: Sum received by an Employee under approved Superannuation Fund is also exempt from tax u/s
10(13).
mount transferred from unreco ni ed pro ident fund to reco ni ed pro ident fund Out of the sum
standing to the credit of an employee under recognized provident fund which is accorded recognition for
the first time or a part of the sum transfer from unrecogni ed provident fund to the recogni ed provident
fund is taxable under the head salaries. Of all the sums comprises in the transferred balance, the amount
which would have been liable to tax if provident fund had been recognized from the date of institution
of the fund, shall be deemed to be the income received by the employee in the Previous Year in which

recognition of the fund takes effect. The remaining amount is not chargeable to tax. No other relief or
exemption is granted.
mployers Contribution to P is excluded from Salary
1. If the employee has rendered continuous service with his employer for a period of 5 years or more.
2. If he has not rendered such continuous service of 5 years, then the service has been terminated:
(a) By reason of such employees ill health, or
(b) By the contraction or discontinuance of the employers business, or
(c) Any other cause beyond the control of the employee
3. If, on the cessation of his employment, the employee obtains employment with another employer, to
the extent, the accumulated balance due and becoming payable to him is transferred to his individual
account in any recognized fund maintained by such employer.
The period of service rendered under the previous employer(s) should also be included in determining the
period of continuous service in (3) above.
. S
NT C C
ST NC S T G
NC
or t e purpose of
Means
1. Deduction for Entertainment Allowance u/s

16(ii) in case of Government employees
Basic Pay
2. Voluntary Retirement Compensation u/s 10(10C)
Basic Pay + D.A. (forming part of salary for

retirement benefits)
3. Exemption from Gratuity covered

Payment of Gratuity Act u/s 10(10)(ii)
Basic Pay + D.A.
under
4. Exemption from Gratuity not covered under

Payment of Gratuity Act u/s 10(10)(iii)
5. Exemption for Leave Salary u/s 10(10AA)
6. Exemption for House Rent Allowance u/s 10(13A)
Rule 2A
7. Contribution to Recognized Provident Fund
Basic Pay + D.A. (forming part of salary for

retirement benefits) Commission (if received as
a fixed percentage on turnover)
Same as above
Same as above
Same as above
8. Determination of Specified Employee u s 17 Income under the head salaries without benefits
including the value of non-monetary benefits
9. Rent- free accommodation
Salary includes:
Basic Pay
Dearness Allowance (forming part of salary for
retirement benefits)
Employers Contribution to RPF
All Taxable allowances
Bonus or commission or ex-gratia
Any other monetary payment
Salary excludes:
Dearness Allowance ( not forming part of salary)
Exempted allowances
Per uisites u s 17(2) or 17(2)(iii) or its provisions
Any allowance in the nature of medical facility
to the extent not taxable
.
N S
N N
NT T C N C
NS S CT
In Finance Act, 1993 clause (5B) has been inserted in section 10 with effect from the Assessment Year 199495. Exemption under section 10(5B) is not available from the Assessment Year 2003-04.
Salary of orei n Citi ens:
(i) Salary of diplomatic personnel Section
6 ii Remuneration received by foreign citizen as an
official of an embassy, high commission, legation, commission, consulate or trade representation of
a foreign state, or a member of the staff of any of that official will be exempt from tax if corresponding
Indian official in that foreign country en oys a similar exemption.
(ii) Salary of forei n employees Section 6 i The remuneration received by a foreign national, as
an employee of a foreign enterprise, for services rendered by him during his stay in India, is totally
exempt from tax provided: (a) the foreign enterprise is not engaged in any business or trade in
India; (b) his stay in India does not exceed a period of 90 days in such Previous Year; and (c) such
remuneration is not liable to be deducted from the income of the employer chargeable under the
Income Tax Act.
(iii) Salary recei ed by a s ip s cre Section
6 iii Salary received by, or due to, a non-resident
foreign national as a member of a ships crew is exempt from tax provided his total stay in India does
not exceed 90 days during the Previous Year.
(iv) emuneration of a forei n trainee of forei n nation as an employee of a forei n o ernment, during
his stay in India, is exempt from tax, if remuneration is received in connection with training in an
undertaking or office owned by-(a) the Government; or(b) any company owned by the Central
Government or any State Government; or (c) any company which is subsidiary of a company
referred to in (b) supra; or (d) any statutory corporation; or (e) any co-operative society, wholly
financed by the Central Government, or any State Government.
4.11 RELIEF UNDER SECTION 89
If an individual receives any portion of his salary in arrears or in advance or receives profit in lieu of salary,
he can claim relief in terms of section 89 read with rule 21A as under:
Computation of relief
en salary as been recei ed in arrears or in ad ance ule
The relief on salary received in arrears or in advance (hereinafter to be referred as additional salary) is
computed in the manner laid down in rule 21A (2) as under:
1.
Calculate the tax payable on the total income, including the additional salary, of the relevant Previous
Year in which the same is received.
2.
Calculate the tax payable on the total income, excluding the additional salary, of the relevant
Previous Year in which the additional salary is received.
3.
Find out the difference between the tax at (1) and (2).
4.
Compute the tax on the total income after including the additional salary in the Previous Year to
which such salary relates.

5.
Compute the tax on the total income after excluding the additional salary in the Previous Year to
which such salary relates.
6.
Find out the difference between the tax at (3) and (4).
7.
The excess of tax computed at (3) over tax computed at (6) is the amount of relief admissible under
section 89. No relief is, however, admissible if tax computed at (3) is less than tax computed at (6). In
such a case, the assessee-employee need not apply for relief.
If the additional salary relates to more than one Previous Year, salary would be spread over the Previous
Years to which it pertains in the manner explained above.

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Study Note - 4

INCOME FROM SALARIES

DIRECT TAXATION I 4.1

Income from Salaries

4.2 I DIRECT TAXATION

Place of accrual of Salary at a lance:

tem ise applicability of Salary :

DIRECT TAXATION I 4.3

Income from Salaries

Pension is paid in pursuance to the terms of employment. Hence any amount

ully taxable components of Salary :

11. Lunch Tiffin Allowance

12. Overtime Allowance

13. Servant Allowance

5. City Compensatory Allowance

14. arden Allowance

15. Non-practicing Allowance

7. Commission as a percentage on turnover

16. Family Allowance

8. Fixed Medical Allowance

17. Leave encashment during service

18. Holiday Allowance

Profits in ieu of Salary u s

Compensation due or received from present/former employer in connection with

modification of terms and conditions of employment.

Sum received under Keyman Insurance Policy, including Bonus on it.

e holds 20 or more of e uity voting power in the company,

4.4 I DIRECT TAXATION

. ully taxable allo ances it out any exemptions:

8. Lunch Tiffin Allowance

2. Dearness Allowance / Pay

3. Fixed Medical Allowance

10. Servant Allowance

4. City Compensatory Allowance

11. arden Allowance

12. Non-practicing Allowance

13. Leave encashment during service

14. Holiday Allowance

. Specific allo ances t at are fully exempt in t e ands of employees

Conditions to claim full exemption

Should be provided by the employer and spent by the employee to

DIRECT TAXATION I 4.5

Income from Salaries

Should be spent by the employee for meeting the daily charges

Should be used by the employee to meet the expenditure on

Should be used by an employee to meet the expenditure on a helper

Should be used by the employee for his academic research and

Should be spent by the employee for purchasing maintaining office

7. Allowances and perks paid Fully exempted

Travelling allowance for official purpose

Travelling allowance given at the time of transfer

Conveyance allowance for official purposes

Helper allowances for engaging helper for

Nature of llo ance

en xemption does not depend upon xpenditure

Nature of llo ance

4.6 I DIRECT TAXATION

xemption as specified in ule BB

Border Area Allowance

Tribal Areas/ Scheduled

Tribal areas allowance is given in (a) ` 200 per month

Allowance for Transport

The amount of exemption is :(i) 70 % of such allowance; or