INCOME FROM SALARIES

BASIC CONCEPT

Any payment made by an employer to an employee for the services rendered by him is chargeable to tax as salary and envisages a ‘contract of
employment’. The employer - employee relationship or master-servant relationship is an essential ingredient of a ‘contract of employment’ as
against a ‘contract for employment’.

The distinguishing feature of a ‘contract of employment’ that differentiates it from a ‘contract for employment’ is that the master or employer
has the right to supervise and control the work done by the employee and not only directs what and when the work is to be done, but also
how it should be done, and the employee is bound to carry out the said instructions. On the other hand, under a contract for employment, the
master merely directs what is to be done, while the methodology for carrying out the work is left to the discretion of the servant. E.g. any fees
received by a part-time consultant will not be assessed as salary but will be taxed as income from business or profession, or as income from
other sources. Similarly, in the absence of master - servant relationship, any remuneration received by a partner from his firm is not regarded as
salary.

It is strictly correct to say that everyone who is an employee is employed by another, it is not equally true to say that everyone who is employed
by other is his employee.

BASIS OF CHARGE: [SECTION 15]

Salaries.
15. The following income shall be chargeable to income-tax under the head "Salaries"—
(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it
became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to
income-tax for any earlier previous year.
Explanation 1.—For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any
person for any previous year it shall not be included again in the total income of the person when the salary becomes due.
Explanation 2.—Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the
firm shall not be regarded as "salary" for the purposes of this section.
"Salary", "perquisite" and "profits in lieu of salary" defined.
17. For the purposes of sections 15 and 16 and of this section,—
(1) "salary" includes—
(i) wages;
(ii) any annuity or pension;
(iii) any gratuity;
(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
(v) any advance of salary;
(va) any payment received by an employee in respect of any period of leave not availed of by him;
(vi) the annual accretion to the balance at the credit 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;
(vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 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) thereof; *and
(viii) 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 80CCD;**
80[(ix) the contribution made by the Central Government in the previous year, to the Agniveer Corpus Fund account of an individual enrolled
in the Agnipath Scheme referred to in section 80CCH;]
81(2) "perquisite" includes—
(i) the value of rent-free accommodation provided to the assessee by his employer 82[computed in such manner as may be prescribed];
(ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer.
Explanation 1.—For the purposes of this sub-clause, concession in the matter of rent shall be deemed to have been provided if,—
(a) in a case where an unfurnished accommodation is provided by any employer other than the Central Government or any State
Government and—
 (i) the accommodation is owned by the employer, the value of the accommodation determined at the specified rate in respect
of the period during which the said accommodation was occupied by the assessee during the previous year, exceeds the
rent recoverable from, or payable by, the assessee;
(ii) the accommodation is taken on lease or rent by the employer, the value of the accommodation being the actual amount
of lease rental paid or payable by the employer or fifteen per cent of salary, whichever is lower, in respect of the period
during which the said accommodation was occupied by the assessee during the previous year, exceeds the rent
recoverable from, or payable by, the assessee;
(b) in a case where a furnished accommodation is provided by the Central Government or any State Government, the licence fee
determined by the Central Government or any State Government in respect of the accommodation in accordance with the
rules framed by such Government as increased by the value of furniture and fixtures in respect of the period during which the
said accommodation was occupied by the assessee during the previous year, exceeds the aggregate of the rent recoverable
from, or payable by, the assessee and any charges paid or payable for the furniture and fixtures by the assessee;
(c) in a case where a furnished accommodation is provided by an employer other than the Central Government or any State
Government and—
(i) the accommodation is owned by the employer, the value of the accommodation determined under sub-clause (i) of clause
(a) as increased by the value of the furniture and fixtures in respect of the period during which the said accommodation
was occupied by the assessee during the previous year, exceeds the rent recoverable from, or payable by, the assessee;
(ii) the accommodation is taken on lease or rent by the employer, the value of the accommodation determined under sub-
clause (ii) of clause (a) as increased by the value of the furniture and fixtures in respect of the period during which the said
accommodation was occupied by the assessee during the previous year, exceeds the rent recoverable from, or payable
by, the assessee;
(d) in a case where the accommodation is provided by the employer in a hotel (except where the assessee is provided such
accommodation for a period not exceeding in aggregate fifteen days on his transfer from one place to another), the value of
the accommodation determined at the rate of twenty-four per cent of salary paid or payable for the previous year or the actual
charges paid or payable to such hotel, whichever is lower, for the period during which such accommodation is provided,
exceeds the rent recoverable from, or payable by, the assessee.
Explanation 2.—For the purposes of this sub-clause, value of furniture and fixture shall be ten per cent per annum of the cost of
furniture (including television sets, radio sets, refrigerators, other household appliances, air-conditioning plant or equipment or other
 similar appliances or gadgets) or if such furniture is hired from a third party, the actual hire charges payable for the same as reduced
by any charges paid or payable for the same by the assessee during the previous year.
Explanation 3.—For the purposes of this sub-clause, "salary" includes the 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, but does not
include the following, namely:—
(a) dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the
employee concerned;
(b) employer's contribution to the provident fund account of the employee;
(c) allowances which are exempted from the payment of tax;
(d) value of the perquisites specified in this clause;
(e) any payment or expenditure specifically excluded under the proviso to this clause.
Explanation 4.—For the purposes of this sub-clause, "specified rate" shall be—
(i) fifteen per cent of salary in cities having population exceeding twenty-five lakhs as per 2001 census;
(ii) ten per cent of salary in cities having population exceeding ten lakhs but not exceeding twenty-five lakhs as per 2001 census;
and
(iii) seven and one-half per cent of salary in any other place;
Following sub-clause (ii) and Explanation shall be substituted for the existing sub-clause (ii) and Explanations 1 to 4 of clause (2)
of section 17 by the Finance Act, 2023, w.e.f. 1-4-2024:
(ii) the value of any accommodation provided to the assessee by his employer at a concessional rate.
Explanation.—For the purposes of this sub-clause, it is clarified that accommodation shall be deemed to have been provided at a
concessional rate, if the value of accommodation computed in such manner as may be prescribed, exceeds the rent recoverable
from, or payable by, the assessee;
(iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases—
(a) by a company to an employee who is a director thereof;
(b) by a company to an employee being a person who has a substantial interest in the company;
 (c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause 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 payment, exceeds fifty thousand rupees:
Explanation.—For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for
journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not
be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-
clause;
(iiia) [***]
(iv) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee;
(v) any sum payable by the employer, whether directly or through a fund, other than a recognised provident fund or an approved
superannuation fund or a Deposit-linked Insurance Fund established under section 3G of the Coal Mines Provident Fund and
Miscellaneous Provisions Act, 1948 (46 of 1948), or, as the case may be, section 6C of the Employees' Provident Funds and
Miscellaneous Provisions Act, 1952 (19 of 1952), to effect an assurance on the life of the assessee or to effect a contract for an
annuity;
(vi) the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former
employer, free of cost or at concessional rate to the assessee.
Explanation.—For the purposes of this sub-clause,—
(a) "specified security" means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956
(42 of 1956) and, where employees' stock option has been granted under any plan or scheme therefor, includes the securities
offered under such plan or scheme;
(b) "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;
(c) the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity
shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually
paid by, or recovered from, the assessee in respect of such security or shares;
(d) "fair market value" means the value determined in accordance with the method as may be prescribed;
 (e) "option" means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares
at a predetermined price;
(vii) the amount or the aggregate of amounts of any contribution made to the account of the assessee by the employer—
(a) in a recognised provident fund;
(b) in the scheme referred to in sub-section (1) of section 80CCD; and
(c) in an approved superannuation fund,
to the extent it exceeds seven lakh and fifty thousand rupees in a previous year;
(viia) the annual accretion by way of interest, dividend or any other amount of similar nature during the previous year to the balance at
the credit of the fund or scheme referred to in sub-clause (vii) to the extent it relates to the contribution referred to in the said sub-
clause which is included in total income under the said sub-clause in any previous year computed in such manner as may be
prescribed83; and
(viii) the value of any other fringe benefit or amenity as may be prescribed84:
Provided that nothing in this clause shall apply to,—
(i) the value of any medical treatment provided to an employee or any member of his family in any hospital maintained by the employer;
(ii) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment
of any member of his family—
(a) in any hospital maintained by the Government or any local authority or any other hospital approved by the Government for
the purposes of medical treatment of its employees;
(b) in respect of the prescribed diseases85 or ailments, in any hospital approved by the Principal Chief Commissioner or Chief
Commissioner having regard to the prescribed guidelines86:
Provided that, in a case falling in sub-clause (b), the employee shall attach87 with his return of income a certificate from the
hospital specifying the disease or ailment for which medical treatment was required and the receipt for the amount paid to
the hospital;
88[(c) in respect of any illness relating to COVID-19 subject to such conditions as the Central Government may, by notification in the
Official Gazette, specify in this behalf;]
 (iii) any portion of the premium paid by an employer in relation to an employee, to effect or to keep in force an insurance on the health
of such employee under any scheme approved by the Central Government or the Insurance Regulatory and Development Authority
established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), for the
purposes of clause (ib) of sub-section (1) of section 36;
(iv) any sum paid by the employer in respect of any premium paid by the employee to effect or to keep in force an insurance on his health
or the health of any member of his family under any scheme approved by the Central Government or the Insurance Regulatory and
Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act,
1999 (41 of 1999), for the purposes of section 80D;
(v) [***]
(vi) any expenditure incurred by the employer on—
(1) medical treatment of the employee, or any member of the family of such employee, outside India;
(2) travel and stay abroad of the employee or any member of the family of such employee for medical treatment;
(3) travel and stay abroad of one attendant who accompanies the patient in connection with such treatment,
subject to the condition that—
(A) the expenditure on medical treatment and stay abroad shall be excluded from perquisite only to the extent permitted by the
Reserve Bank of India; and
(B) the expenditure on travel shall be excluded from perquisite only in the case of an employee whose gross total income, as
computed before including therein the said expenditure, does not exceed two lakh rupees;
(vii) any sum paid by the employer in respect of any expenditure actually incurred by the employee for any of the purposes specified in
clause (vi) subject to the conditions specified in or under that clause :
Provided further that for the assessment year beginning on the 1st day of April, 2002, nothing contained in this clause shall apply to any
employee whose income under the head "Salaries" (whether due from, or paid or allowed by, one or more employers) exclusive of the value
of all perquisites not provided for by way of monetary payment, does not exceed one lakh rupees.
Explanation.—For the purposes of clause (2),—
(i) "hospital" includes a dispensary or a clinic or a nursing home;
(ii) "family", in relation to an individual, shall have the same meaning as in clause (5) of section 10; and
 (iii) "gross total income" shall have the same meaning as in clause (5) of section 80B;
(3) "profits in lieu of salary" includes—
(i) 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;
(ii) any payment (other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12), clause (13) or
clause (13A) of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other
fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received
under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
Explanation.—For the purposes of this sub-clause, the expression "Keyman insurance policy" shall have the meaning assigned to it
in clause (10D) of section 10;
(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.

As per Section 15, salary consists of the following:

• any salary due from an employer or a former employer to an assessee in the previous year, whether actually paid or not;
• Any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, though not due or before it
became due;
• Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to
income-tax for any earlier previous year.

Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier. Once taxed on due basis, the same salary will not once
again be taxed on receipt and vice versa.
TAX TREATMENT OF DIFFERENT FORMS OF SALARIES

Type of salary Taxability

Advance salary Taxable on receipt basis, in the year in which it is received. Relief under section 89 available.
Arrears of salary Taxable on receipt basis if the same is not taxed earlier on due basis. Relief under section 89 available
Salary in lieu of notice period Taxable under section 15
Salary paid to a partner is an appropriation of profits. It is therefore not taxable under the head
Salary to a partner
“Salaries” but is taxable under head “profit and gains of business or profession”
Fees and commission Taxable as salary irrespective of the fact that they are paid in addition to or in lieu of salary
Salary paid tax free Taxable amount includes the salary as well as the tax borne by the employer
Salary forgone Application of salary already due; hence taxable
Salary diverted at source by overriding
Not taxable
title
Deferred Salary Taxable at the point of deferral if deferral is at the option of the employee

DEDUCTIONS FROM SALARIES [SECTION 16]

1. Standard Deduction [Section 16(ia)]

A standard deduction is allowed against the salary income subject to a limit of ₹ 50,000/- or the amount of salary whichever is less.

2. Entertainment Allowance [Section 16(ii)]

Entertainment allowance is a taxable allowance and forms a part of the taxable salary. However, Government employees who are in receipt of
such an allowance are eligible for a deduction in respect of the entertainment allowance received by them to the extent of the least of the
following:

• ₹ 5,000/-
• 1/5th of salary excluding allowances or benefits or perquisites
• Actual entertainment allowance received

The actual expenditure incurred for the purposes of entertainment is not relevant to the calculation of the deduction. No such deduction is
available to employees other than Government employees.

3. Tax on Employment [Section 16(iii)]

• Certain Indian States levy a tax on employment commonly known as Profession tax which is required to be recovered by the employer
from the salary paid to the employee and deposited into the treasury. Such tax paid by an employee is allowed as deduction from his
Salary.
• Deduction is available in the year in which profession tax is actually paid, regardless of which year the profession tax pertains to.
• If Profession Tax is reimbursed/borne by the employer, then such Profession Tax reimbursed/borne by the employer is first included in
the taxable income as a perquisite & then allowed as deduction under section 16(iii).

SALARY, PERQUISITES AND PROFITS IN LIEU OF SALARY [SECTION 17]

Section 17 provides inclusive definition of ‘salary’, ‘perquisites’ and ‘Profits in Lieu of Salary’. Hence, the scope of these terms cannot be restricted
to and can extend beyond the specific components listed in the definitions.

Salary Perquisite Profit in lieu of salary

• Wages • Rent-free accommodation • Compensation from the employer or

• Annuity or pension former employer at or in connection
 • Gratuity • Accommodation provided at with termination of employment or
concessional rates modification of the terms and
• Fees, commission, perquisites or
conditions of employment
profits in lieu of or in addition to any • Benefit or amenity granted free of cost
salary or wages or at concessional rates to specified • Any payment from the employer or
employees former employer or from a PF or other
• Advance salary
fund, to the extent it does not consist
• Leave encashment • Obligation of employee met by the
of employee's contribution or interest
• Employer contributions to Provident • Sum payable by the employer (whether thereon
Fund (PF) and interest in excess of the directly or through a fund) to effect an
• Any sum received under a Keyman
prescribed limits assurance on the life of the employee
insurance policy including bonus on
or to effect a contract for annuity
• Taxable portion of the balance such policy
except through a recognised PF,
transferred to a newly recognized • Any amount received in lumpsum or
Approved Superannuation Fund and
provident fund otherwise from any person before
Deposit Linked Insurance Fund
• Employer's contributions to National joining or after cessation of
• Securities and Stock Awards (ESOP)
Pension Scheme (NPS) employment
• Aggregate of employer’s contribution
to Provident Fund, National Pension
Scheme (NPS) and Superannuation
Fund in excess of prescribed and the
annual accretions on such taxable
contributions, computed in the
prescribed manner.
• Any other fringe benefit or amenity as
prescribed in Rule 3 of the Income Tax
Rules, 1962

ALLOWANCES
An allowance is a fixed amount of money paid regularly in addition to the salary for meeting specific requirements of the employees. As a general
rule, any fixed allowance received by an employee forms part of his taxable salary unless specifically exempted. The taxability of various
allowances an employee could receive is summarized in the table below:

Allowances Taxability/Limits Section

Leave Travel Allowance (LTA) Assessee who incurs expenditure for 10(5) read with Rule 2B

• travel for assessee and his family (up to 2 children)

• on leave to any destination in India

is eligible for exemption in respect of LTA to the extent of expenses

actually incurred for the purpose of such travel subject to the
following limits:

Exemption only in 2 out of a block of 4 years with option to claim

exemption for 1 journey (out of the 2) in the calendar year
immediately following the end of the block.

Allowance granted to Government Fully Exempt 10(7)

Employees outside India
House Rent Allowance (HRA) The least of the following is exempt: 10(13A) read with Rule 2A

• 40% of salary [50% if house situated at Mumbai, Kolkata, Delhi

or Chennai]
• HRA actually received in respect of the period during which the
accommodation is occupied on rent.
• Rent Paid - (Salary x 10%)
 [Salary = Basic + Dearness Allowance (if provided by the terms of
employment) + commission based on fixed % of turnover]

Exemption shall not be allowed, if the employee resides in a house

that is owned by him or if no actual expenditure is incurred by the
employee on rent
Uniform Allowance Exempt from tax, to the extent it is expended to meet actual 10(14) read with Rule 2BB(1)
expenditure on purchase or maintenance of uniform
Academic, research and training Exempt from tax, to the extent it is actually expended by the 10(14) read with Rule 2BB(1)
allowance employee for the purpose of academic, research and training
pursuits in educational and research institutions
Travel allowance Exempt from tax, to the extent it is actually expended by the 10(14) read with Rule 2BB(1)
employee to meet cost of travel on tour or on transfer. This includes
any sum paid in connection with transfer, packing and transportation
of personal effects on transfer
Per diem Exempt from tax, to the extent it is actually expended to meet the 10(14) read with Rule 2BB(1)
ordinary daily charges incurred by an employee on account of
absence from his normal place of duty while on tour or for the period
of journey in connection with transfer
Conveyance allowance (official Exempt from tax, to the extent it is actually expended by the 10(14) read with Rule 2BB(1)
duties) employee to meet expenditure incurred on conveyance in
performance of duties of an office or employment of profit.
Exemption is not available if free conveyance is provided by the
employer
Helper allowance Exempt from tax, to the extent it is actually expended to meet the 10(14) read with Rule 2BB(1)
expenditure incurred on a helper where such helper is engaged for
the performance of the duties of an office or employment of profit
Children Education allowance Exempt up to ₹ 100 per month per child; maximum 2 children 10(14) read with Rule 2BB(2)
Children hostel allowance Exempt up to ₹ 300 per month per child; maximum 2 children 10(14) read with Rule 2BB(2)
Allowance granted to an employee Lower of 70% of allowance or ₹ 10,000 per month is exempt 10(14) read with Rule 2BB(2)
working in any transport system Exemption is not available if the employee is in receipt of a daily
allowance
Transport Allowance (between Exempt up to ₹ 3,200 per month
residence and office) to an
employee who is blind or deaf and
dumb or orthopedically
handicapped with disability of
lower extremities
Tribal area allowance Exempt up to ₹ 200 per month in specified areas 10(14) read with Rule 2BB(2)
Compensatory field area Exempt up to ₹ 2,600 per month in specified areas 10(14) read with Rule 2BB(2)
allowance
Compensatory modified field area Exempt up to ₹ 1,000 per month in specified areas 10(14) read with Rule 2BB(2)
allowance
Special Compensatory hill area or Exempt up to ₹ 300 per month to ₹ 7,000 per month in specified 10(14) read with Rule 2BB(2)
high altitude areas
Border area, remote area, Exempt up to ₹ 200 per month to ₹ 1,300 per month for specified 10(14) read with Rule 2BB(2)
Difficult/disturbed area allowance areas
High altitude allowance (Non- Exempt up to ₹ 1,060 per month (Altitude for 9,000 ft. to 15,000 ft.), 10(14) read with Rule 2BB(2)
congenial climate) ₹ 1,600 per month (above 15,000 ft.)
Special compensatory for highly Exempt up to ₹ 4,200 per month. 10(14) read with Rule 2BB(2)
active field area allowance to
member of armed force
Underground allowance to an Exempt up to ₹ 800 per month 10(14) read with Rule 2BB(2)
employee working in uncongenial,
unnatural climate in underground
mines
Island duty allowance to member Exempt up to ₹ 3,250 per month in Andaman & Nicobar and 10(14) read with Rule 2BB(2)
of armed force Lakshwadeep Group of Islands
Counter Insurgency Allowance to Exempt up to ₹ 3,900 per month 10(14) read with Rule 2BB(2)
member of armed forces
operating in areas away from their
permanent locations
Dearness allowance Fully Taxable 17
Overtime allowance Fully Taxable 17
Medical allowance Fully Taxable 17
City Compensatory allowance Fully Taxable 17
Interim allowance Fully Taxable 17
Servant allowance Fully Taxable 17
Project allowance Fully Taxable 17
Tiffin/Lunch/Dinner allowance Fully Taxable 17
Warden allowance Fully Taxable 17
Any other cash allowance Fully Taxable 17

*For financial year 2020-21, given the travel restrictions due to Covid-19 pandemic, the cash allowance in lieu of travel concession or assistance
received by or due to an individual was exempt from tax, subject to the following conditions.
 • The employee exercises option for deemed Leave Travel Concession fare in lieu of applicable Leave Travel Concession for the block year
2018-21.
• He/she has incurred expenditure during the period between 12 October 2020 and 31 March, 2021 on goods or services liable to Goods
and Service Tax at 12 percent or above and goods are purchased or services procured from GST registered vendors/service providers.
• Amount of exemption did not exceed lower of INR 36,000 per person or one-third of specified expenditure.
• The employee made payment through account payee cheque, draft or through prescribed electronic mode and tax invoice was obtain
from such vendor/service provider.

Leave Travel Allowance/Concession: exemption

CHAPTER III
INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME
Incomes not included in total income.
Sec. 10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be
included—
………
(5) in the case of an individual, the value of any travel concession or assistance received by, or due to, him,—
(a) from his employer for himself and his family, in connection with his proceeding on leave to any place in India ;
(b) from his employer or former employer for himself and his family, in connection with his proceeding to any place in India after
retirement from service or after the termination of his service,
subject to such conditions as may be prescribed48 (including conditions as to number of journeys and the amount which shall be
exempt per head) having regard to the travel concession or assistance granted to the employees of the Central Government :
Provided that the amount exempt under this clause shall in no case exceed the amount of expenses actually incurred for the
purpose of such travel:
 49[Provided further that for the assessment year beginning on the 1st day of April, 2021, the value in lieu of any travel concession
or assistance received by, or due to, such individual shall also be exempt under this clause subject to the fulfilment of such conditions
(including the condition of incurring such amount of such expenditure within such period), as may be prescribed.]
49a[Explanation 1].—For the purposes of this clause, "family", in relation to an individual, means—
(i) the spouse and children of the individual ; and
(ii) the parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the individual.
49b[Explanation 2.—For the removal of doubts, it is hereby clarified that where an individual claims exemption and the exemption
is allowed under the second proviso in connection with the prescribed expenditure, no exemption shall be allowed under this clause
in respect of such prescribed expenditure to any other individual;]

[Conditions for the purpose of section 10(5) .

Rule 2B. (1) The amount exempted under clause (5) of section 10 in respect of the value of travel concession or assistance received by or due
to the individual from his employer or former employer for himself and his family, in connection with his proceeding,—
(a) on leave to any place in India;

(b) to any place in India after retirement from service or after the termination of his service,

shall be the amount actually incurred on the performance of such travel subject to the following conditions, namely :—
[(i) where the journey is performed on or after the 1st day of October, 1997, by air, an amount not exceeding the air economy fare of the
national carrier by the shortest route to the place of destination;

(ii) where places of origin of journey and destination are connected by rail and the journey is performed on or after the 1st day of October,
1997, by any mode of transport other than by air, an amount not exceeding the air-conditioned first class rail fare by the shortest route
to the place of destination; and
 (iii) where the places of origin of journey and destination or part thereof are not connected by rail and the journey is performed on or
after the 1st day of October, 1997, between such places, the amount eligible for exemption shall be :—

(A) where a recognised public transport system exists, an amount not exceeding the 1st class or deluxe class fare, as the case may
be, on such transport by the shortest route to the place of destination; and

(B) where no recognised public transport system exists, an amount equivalent to the air-conditioned first class rail fare, for the
distance of the journey by the shortest route, as if the journey had been performed by rail.]
1[(1A)For the assessment year beginning on the 1st day of April, 2021, where the individual referred to in sub-rule (1) avails any cash allowance
from his employer in lieu of any travel concession or assistance, the amount exempted under the second proviso to clause (5) of section 10 shall
be the amount, not exceeding thirty-six thousand rupees per person, for the individual and the member of his family, or one-third of the specified
expenditure, whichever is less, subject to fulfilment of the following conditions, namely:-
(i) the individual has exercised an option to avail exemption under the second proviso of clause (5) of section 10, in lieu of the exemption
under clause (5) of section 10 in respect of one unutilised journey during the block of four calendar years commencing from the calendar
year 2018;

(ii) the payment in respect of the specified expenditure is made by the individual or any member of his family to a registered person during
the specified period;

(iii) the payment in respect of the specified expenditure is made by an account payee cheque drawn on a bank or account payee bank draft,
or use of electronic clearing system through a bank account or through such other electronic mode as prescribed under rule 6ABBA;
and

(iv) the individual obtains a tax invoice in respect of specified expenditure from the registered person referred in clause (ii).

Explanation 1- For the purpose of this sub-rule,-

(i) "tax invoice" means an invoice issued by the registered person under section 31 of the Central Goods and Services Tax Act, 2017 (No.
12 of 2017);
 (ii) "registered person" shall have the meaning assigned to it in clause (94) of section 2 of the Central Goods and Services Tax Act, 2017
(No. 12 of 2017);

(iii) "specified expenditure" means expenditure incurred by an individual or a member of his family during specified period on goods or
services, which are liable to tax at an aggregate rate of twelve per cent. or above under various Goods and Services Tax (GST) laws and
goods are purchased or services procured from GST registered vendors or service providers;

(iv) "specified period" means the period commencing from the 12th day of October, 2020 and ending on the 31st day of March, 2021.

Explanation 2 For the removal of doubt, it is hereby clarified that if the amount received by or due to an individual, as per the terms of his
employment, from his employer in relation to himself and member of his family, in connection with the specified expenditure is in excess of the
thirty six thousand rupees per person, for the individual and the member of his family, the exemption under this sub-rule would be restricted to
thirty-six thousand rupees per person, for the individual and the member of his family, or one-third of the specified expenditure, whichever is
less.
Explanation 3 It is hereby clarified that the clarification issued by the Department of Expenditure, Ministry of Finance, vide OM F. No 12(2)/2020-
EII (A) Dated 12th October, 2020 and any subsequent clarifications, if any, issued in this regard shall apply mutatis mutandis to the exemption
under this sub-rule.
(1B) Where an exemption under the second proviso to clause (5) of section 10 is claimed and allowed, sub-rule (2) shall have effect as if for the
words "two journeys" , the words "one journey" has been substituted]
(2) The exemption referred to in sub-rule (1) shall be available to an individual in respect of two journeys performed in a block of four calendar
years commencing from the calendar year 1986 :
[Provided that nothing contained in this sub-rule shall apply to the benefit already availed of by the assessee in respect of any number of
journeys performed before the 1st day of April, 1989 except to the extent that the journey or journeys so performed shall be taken into account
for computing the limit of two journeys specified in this sub-rule.]
(3) Where such travel concession or assistance is not availed of by the individual during any such block of four calendar years, an amount in
respect of the value of the travel concession or assistance, if any, first availed of by the individual during first calendar year of the immediately
succeeding block of four calendar years shall be eligible for exemption.
Explanation : The amount in respect of the value of the travel concession or assistance referred to in this sub-rule shall not be taken into account
in deter-mining the eligibility of the amount in respect of the value of the travel con-cession or assistance in relation to the number of journeys
under sub-rule (2).]
[(4) The exemption referred to in sub-rule (1) shall not be available to more than two surviving children of an individual after 1st October, 1998
:
Provided that this sub-rule shall not apply in respect of children born before 1st October, 1998, and also in case of multiple births after one
child.]

Leave Travel Allowance (LTA)

As the name suggests, it is an exemption for allowance/assistance/concession received by the employee from his employer for travelling on

leave. Though it sounds simple, many factors need to be kept in mind before planning the travel to claim an LTA exemption. Income tax

provision has laid down rules for claiming exemption of LTA which are provided below.

Conditions for Claiming LTA

Let us understand the conditions/requirements for claiming the exemption.

• Actual journey is a must to claim the exemption

• Only domestic travel is considered for exemption, i.e., travel within India. No international travel is covered under LTA
 • The exemption for travel is available for the employee alone or with his family, where ‘family’ includes the employee’s spouse,

children and wholly or mainly dependent parents, brothers, and sisters of the employee.

• Further, such an exemption is not available for more than two children of an employee born after 1 October 1998. Children born

before 1 October 1998 do not have any restrictions. Further, in cases of multiple births on a second occasion after having one

child is also not affected by this restriction.

Eligible LTA Exemption

The exemption is available only on the actual travel costs i.e., the air, rail or bus fare incurred by the employee. No expenses such as local

conveyance, sightseeing, hotel accommodation, food, etc., are eligible for this exemption. The exemption is also limited to LTA provided by the

employer.

For example, if LTA granted by the employer is Rs 30,000, and the actual eligible travel cost incurred by the employee is Rs 20,000, the

exemption is available only to the extent of Rs 20,000, and the balance of Rs 10,000 would be included in taxable salary income.

Exemption w.r.t various modes of transport

Sl
Scenario Eligible exemption
No

The amount equivalent to the air-conditioned first

Place of journey and destination are
class rail fare, for the distance of the journey by
1 not connected by any recognised
the shortest route, as if the journey had been
public transport system
performed by rail.

Place of journey and destination are

The amount restricted to 1st class or deluxe class
not connected by rail (partly/fully)
2 fare by the shortest route to the place of
but connected by other recognised
destination
public transport

Place of journey and destination are The amount spent for any mode of transport
3
connected by rail other than by air, restricted to air-conditioned first
 class rail fare by the shortest route to the place of

destination

The amount is restricted to the air economy fare

4 Journeys performed by air of the national carrier(Indian Airlines or Air India)

by the shortest route to the place of destination.

Can LTA exemption be claimed on every vacation?

No, an LTA exemption is available for only two journeys performed in a block of four calendar years.

Block Year

A block year is different from a financial year and is decided by the Government for LTA exemption purposes. It comprises of 4 years each. The

very first 4-year block commenced in 1986. The list of block years is 1986-1989, 1990-93, 1994-97, 1998-2001, 2002-05, 2006-09, 2010-13 and
so on. The block applicable for the current period is the calendar year 2022-25. The previous block was the calendar year 2018-21.
Carryover of Unclaimed LTA

In case an employee has not availed exemption with respect to one or two journeys in any of the block of 4 years, he is allowed to carryover
such exemption to the next block provided he avails this benefit, in the first calendar year of immediately succeeding block.

Consider the below example for a better understanding:

• Where carry over exemption is claimed in the first calendar year of the immediately succeeding block

Particulars of
Block year 2014-17 Block year 2018-21
journey
 Exemption claimed
April 2015 NA
in April 2015

Exemption claimed in June 2018 (considered

June 2018 NA
to be carried over from the previous block)

March 2020 NA Exemption claimed in March 2020

January 2022 NA Exemption claimed in January 2022

• Where carry over exemption is not claimed in the first calendar year of the immediately succeeding block

Particulars of
Block year 2014-17 Block year 2018-21
journey
 Exemption claimed
April 2015 NA
in April 2015

Exemption claimed in June 2019 (Can’t be

considered to be carried over from the previous

June 2019 NA
block as travel should have been performed in 2018

itself)

March 2020 NA Exemption claimed in March 2020

No exemption available as two eligible journeys

January 2021 NA already claimed. (Maybe claimed by the working

spouse of the employee receiving LTA)

Procedure to Claim LTA

The procedure to claim LTA is generally employer specific. Every employer announces the due date within which LTA can be claimed by the

employees and may require employees to submit proof of travel such as tickets, boarding pass, invoice provided by travel agent etc., along

with the mandatory declaration. Though it is not mandatory for employers to collect proof of travel, it is always advisable for employees to

keep copies for his/her records and also to submit them to the employer based on the LTA policy of the company/to tax authorities on

demand.

Multi-Destination journey

Income tax provision provides exemption w.r.t travel cost incurred on leave to any place in India. Conditions pertaining to the mode of

transport also refer to the place of ‘origin’ to the place of ‘destination’ and the route which must be the shortest available route.

Hence, if an employee travels to different places in a single vacation, the exemption can only be availed for the travel cost eligible from the

place of origin to the farthest place in the vacation by the shortest possible route.

LTA Exemption for Vacation on Holidays

Many organisations that go strictly by the wordings of the income tax provision are allowing employees to claim LTA only if the employee
applies for leaves and travel during that time. Such organisations may reject LTA claims for travel on official holidays or weekends.
Frequently Asked Questions

How much can I claim tax exemption in Leave Travel Allowance or LTA?

The amount of LTA exemption depends on the LTA component in your compensation package or CTC. You can furnish proof of travel within

the block period and claim up to the amount prescribed in your CTC.

What is the latest block period to claim LTA exemption?

The latest block period of four years is from 1 January 2022 until 31 December 2025.

How many trips can I make in one year to claim the exemption?

You can claim LTA exemption only for one trip in one calendar year.

Can I claim LTA benefit for the travel costs of my family?

You can claim LTA benefit for the travel costs of yourself and your family consisting of your spouse, children, dependent parents, brothers, and

sisters of the employee.

CASE LAW:

No denial of LTC exemption even if travel is not undertaken through shortest route: Mumbai ITAT

• Case Details: State Bank of India v. ACIT

Citation: [2021] 123 taxmann.com 447 (Mumbai – Trib.)

• The Mumbai ITAT held that a plain reading of Section 10(5) read with Rule 2B does not indicate any requirement of taking the shortest
route for travelling to any place in India. It does not restrict the route to be adopted for going to such a destination. However, the
statutory provisions do envisage the possibility of someone taking a route other than the shortest route. It is implicit in the restriction
that only an amount not exceeding the air economy fare of the national carrier by the shortest route to the place of destination is
eligible for exemption under section 10(5).
• There is no specific bar in the law on the travel, eligible for exemption under Section 10(5), involving a sector of overseas travel. In the
absence of such a bar, the assessee couldn’t be faulted for not inferring such a bar. The reimbursement was restricted to airfare, on the
national carrier, by the shortest route, as was the mandate of Rule 2B. As part of that composite itinerary involving a foreign sector as
well, the employee had travelled to the destination in India.
• The guidance available to the assessee indicates that, in such a situation, the exemption under section 10(5) was available to the
employee. Such exemption shall be available only to the extent of farthest Indian destination by the shortest route, and that was what
assessee had allowed. In the light of this analysis of the legal position and the factual backdrop, whatever may be the position with
respect to taxability of such a leave travel concession in the hands of the employee, the assessee could not be faulted for not deducting
tax at source from LTC allowed by it to employees.
House Rent Allowance (HRA)

Sec. 10 (13A) any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment
of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be
prescribed61 having regard to the area or place in which such accommodation is situate and other relevant considerations.
Explanation.—For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where—
(a) the residential accommodation occupied by the assessee is owned by him ; or
(b) the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential
accommodation occupied by him ;

House Rent Allowance (HRA) is an exemption in the Income Tax Act that can help lower taxes – partially or wholly. This allowance is for

expenses related to rented accommodation. If you don’t live in a rented accommodation, this allowance is fully taxable.

House Rent Allowance (HRA) is a component of an employee's salary that may be subject to partial or full tax deductions under Section

10(13A) of the Income Tax Act. The calculation of HRA is influenced by several factors, which are as follows:

• Salary

• Rent paid

• HRA receivable by the employee

• City of residence of employee

HRA for Self-Employed Individuals

Individuals who are self-employed can also avail of deductions and tax exemptions towards House Rent Allowance (HRA). They can claim these

benefits by utilizing Section 80 GG.

HRA for Salaried Individuals

Section 10 (13A), rule number 2A of the Income Tax Act allows salaried individuals to claim exemptions for House Rent Allowance (HRA). As

this allowance is a significant part of an individual's salary, it is important to follow the company's policies regarding the claiming of HRA.

Tax Exemption From HRA Calculation

The deduction available is the least of the following amounts:

• Actual HRA received

• 50% of [basic salary + DA] for those living in metro cities (Delhi, Kolkata, Mumbai or Chennai)

• 40% of [basic salary + DA] for those living in non-metros

 • Actual rent paid (-) 10% of basic salary + DA

Illustration

Mr Anwar, employed in New Delhi, has taken up an accommodation on rent for which he pays Rs.15,000 per month during the Financial Year

(FY) 2021-22. He receives a basic salary of Rs.25,000 monthly and DA of Rs.2,000, which forms a part of the salary. He also gets an HRA of Rs.1

lakh from his employer during the year.

Let us understand the HRA component that would be exempt from income tax during FY 2021-22. As per the given data, calculate the

following:

• HRA received – Rs.1 lakh

• 50% of basic salary and DA – Rs.1,62,000 (50%*(Rs 25,000+Rs 2,000)*12 months)

• Rent paid minus 10% of salary- Rs.1,47,600

Therefore, the entire HRA received from the employer is exempt from income tax in the above example.
VALUATION OF PERQUISITES [RULE 3]

Perquisites, for the purposes of taxation, are to be valued on the basis of valuation methodology as prescribed in Rule 3 of the Income Tax Rules.
It is pertinent to note that the cost of the perquisite to the employer may be different from the taxable value of the perquisite. The taxable value
of the perquisite provided by the employer is chargeable to tax whether or not expressly agreed in the contract of employment. A perquisite
may be provided to the employee or any member of his household and may be provided before, during or after the employment by virtue of
the employer- employee relationship. The beneficiary of the perquisite should be individually identifiable - Group benefits which are not
identifiable to any particular employee are not taxable.

1. RENT FREE ACCOMMODTION ['RFA']

Accommodation includes accommodation provided in

• House
• Flat
• Farm House or part thereof
• Caravan
• Mobile home
• Ship or other floating structures
• Hotel

Hotel Accommodation includes accommodation in

• Motels
• Service apartment
• Guest house
* Only to employees holding office or post in connection with the affairs of the Union or State
**As per 2001 census
*** Not taxable if hotel accommodation is provided for not more than 15 days on transfer of employee from one place to another

Furnished Accommodation

In case furniture including TV, washing machine, air conditioner, refrigerator and other household appliances are provided then the value of
accommodation should be increased further by the following:

• 10% p.a. of cost of furniture, if the furniture is owned by the employer or

• actual hire charges, if the furniture is hired from a third party

Accommodation provided at concessional rate

For accommodation provided at concessional rate, the rent actually paid or recovered from the employee should be reduced from the value of
the accommodation determined as above.

For the purpose of above calculation, Salary includes all emoluments paid to an employee but excludes dearness allowance which is not included
in the computation for retirement benefits, allowances which are exempt from tax, value of perquisites under section 17(2), employer’s
contribution to PF and lumpsum payments received on retirement/termination.

Accommodation provided to an employee working on a mining site, onshore exploration site, project site, dam site power generation site or any
other offshore site with prescribed specifications in a remote area is not taxable.

If at the time of transfer from one place to another, an employee is provided accommodation at the new place while he retains accommodation
at the other place, the accommodation with a lower perquisite valuation will be taxed for 90 days and thereafter the value of both
accommodations will be taxable as perquisite.

2. MOTOR CAR

A car provided by the employer to an employee is a popular tax efficient component of compensation especially among the senior employees
of an organisation. The taxable value of a car provided by the employer is determined as per the valuation rules provided in the Income Tax
Rules. The table below summarises the taxable value of a motor car provided by the employer:

Purpose CC* of engine =< 1.6 litres CC* of engine > 1.6 litres
Motor car owned/leased by the employer
Official NIL$ NIL$
Personal purposes only Actual cost of R&M** of car + driver’s salary + Actual cost of R&M of car + driver‘s salary + normal
normal wear and tear @ 10% per annum of the wear and tear @ 10% per annum of the actual cost
actual cost of car less any charges recovered from of car less any charges recovered from the
the employee employee
Personal & Official - R&M met by ₹1,800 p.m. + ₹ 900 p.m. (If driver is provided) ₹ 2,400 p.m. + ₹ 900 p.m. (If driver is provided)
employer
Personal & Official - R&M met by ₹ 600 p.m. + ₹ 900 p.m. (If driver is provided). ₹ 900 p.m. + ₹ 900 p.m. (If driver is provided).
employee
Employee owns motor car but R&M and Driver’s salary met by employer
Official NIL$ NIL$
Personal & Official - R&M met by Actual expenses less ₹ 2,700 p.m. Actual expenses less ₹ 3,300 p.m.
employer
Employee owns any other automotive conveyance but R&M is met and reimbursed by employer
Official NIL$ Not Applicable
Personal & Official - R&M met and Actual expenses less ₹ 900 p.m. Not Applicable
reimbursed by employer
*CC - Cubic capacity
**R&M - Running and maintenance
$ - The employer is required to maintain complete details of journey undertaken for official purpose by the employee with date of journey,
destination, mileage and the amount of expenditure actually incurred. Further, the employer is required to issue a certificate that such
expenditure was incurred wholly and exclusively for official purpose.

3. DOMESTIC SERVANTS

Servants Perquisite Value

Sweeper, Gardener, Watchman or Personal attendant Actual Cost to the employer less amount recovered from employee

4. GAS, ELECTRICITY OR WATER SUPPLIED BY EMPLOYER

Source Perquisite Value
Provided from own source Manufacturing cost to the employer less amount recovered from employee
Provided from outside supplier Amount paid to the supplier less amount recovered from employee

5. EDUCATION FACILITIES

Facility provided to Value of perquisite

Provided in the school owned by the employer Provided in any other school
Cost of such education in similar school if it exceeds ₹ Cost of such education if it exceeds ₹ 1,000 per month
Children
1,000 per month per child per child
Cost of such education in similar institution in or near
Other household member Cost of such education incurred
the locality

The amount if any, recovered from the employee shall be reduced from the perquisite value.

6. SPECIFIED SECURITY OR SWEAT EQUITY SHARES ALLOTTED

1. “Specified Security” means the securities as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956 and also includes
securities offered under an Employee Stock Option Plan (ESOP);
2. 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 nature of Intellectual Property Rights or value additions.
3. Perquisite will be taxable as the difference between the fair market value (FMV) of the share on the date of exercise of the options less
the exercise price.

Calculation of FMV on date of exercising the option

Particulars FMV
Listed on a recognised stock exchange Average of opening and closing price on that date
Average of opening and closing price of the share on the recognised
Listed on more than one recognised stock exchange stock exchange which records the highest volume of trading in the
share
If there is no trading in the share on any recognised stock exchange on that date:
Closing price of share on any recognised stock exchange on a date
If share listed on a recognised stock exchange closest to date of exercising the option and immediately preceding
such date
Closing price of share on any recognised stock exchange, which
If share listed on more than one recognised stock exchanges records the highest volume of trading in such share on a date closest
to date of exercising the option and immediately preceding such date
Such value as determined by a Category I merchant banker listed with
If shares not listed on a recognised stock exchange or any specified
SEBI on the specified date (i.e. Date of exercise or any date not being
security other than equity shares
more than 180 days prior to the date of exercise)

Note: Where the stock exchange quotes both “buy” and “sell” prices, the opening and closing price shall be the “sell” price of the first and last
settlement respectively.

7. MEDICAL EXPENSES

Certain medical expenses borne/reimbursed by the employer are not considered to be a perquisite and are specifically exempted under section
17(2). Such expenses are:

• Medical treatment provided to an employee or any member of his family:

o in the hospital maintained by the employer;
 o in the hospital maintained by the Government/Local authority/any other hospital approved by the government for the medical
treatment of its employee;
o in respect of prescribed disease or ailments in any hospital approved by the Chief Commissioner having regards to the prescribed
guidelines and supported by a certificate and receipt from the hospital;
o in respect of any illness relating to COVID-19 subject to such conditions as the Central Government may specify.
• premium paid/borne by the employer in respect of health insurance of employee or a member of his family under a scheme approved
by the Central Government or the IRDA;
• In case of an employee whose gross total income does not exceed ₹ 2 lakh, any expenditure incurred outside India on the medical
treatment of an employee or member of his family including travel and stay abroad for the patient and one attendant, subject to limits
prescribed by Reserve Bank of India.

8. INTEREST FREE LOAN

Where the employer grants a loan to an employee interest free or at a concessional rate of interest, a notional interest thereon is charged to
tax in the hands of the employee. As per the Income tax rules, the value that will chargeable to tax shall be calculated on the maximum
outstanding monthly balance based on the interest rates charged by the State Bank of India as on the 1st day of the financial year in respect of
loans for the same purpose advanced by it (refer the page on interest rate for the purpose of perquisite valuation on https://www.sbi.co.in as
reduced by the interest actually recovered from the employee.

However no notional interest is charged to tax in the case of the following loans:

• A loan given for the purpose of medical treatment of certain prescribed diseases as mentioned in Rule 3A of the Income-tax rules (and
is not reimbursed to the employee under a medical insurance scheme)
• A loan not exceeding in the aggregate ₹ 20,000/-.

In case the loan is given for medical purpose the employer should obtain the bills, certificate, supporting, etc. from the employee evidencing the
fulfilment of the prescribed conditions.

9. USE OF MOVABLE ASSETS

Assets given Value of benefit
a) Use of laptops and computers Nil
b) Movable asset other than laptops and computers i. 10% p.a of the actual cost, if owned by employer
ii. the amount of rent paid or payable by the employer if hired

As reduced by the amount recovered from employee

10. MOVABLE ASSETS SOLD TO EMPLOYEE

Assets given Value of benefit

Computers and electronics Depreciated value of the asset (depreciation is computed @50% on WDV for
each completed year of usage)

Less: amount recovered from employee

Motor Cars Depreciated value of the asset (depreciation is computed @20% on WDV for
each completed year of usage)

Less: amount recovered from employee

Any other asset Depreciated value of the asset (depreciation is computed @10% on SLM for
each completed year of usage)

Less: amount recovered from employee

11. TOUR OR TRAVEL

Benefit provided Value of benefit

Value of tour, travel and accommodation provided to an employee or Amount of expenditure actually incurred
member of his household paid or borne by employer and not covered
under section 10(5) Less: Amount recovered from the employee
Value of tour, travel and accommodation provided to an employee or Value at which such services are offered to public by other agencies
member of his household where the facility is maintained by the
employer and is not provided uniformly to all employees Less: Amount recovered from the employee
Amount of expenditure actually incurred
Value of tour, travel and accommodation provided to a member of
the employee’s household where the employee is on official tour*
Less: Amount recovered from the employee
*Where an official tour is extended as vacation, the value of benefit shall be restricted to the extended period of stay or vacation.

12. MISCELLANEOUS

Particulars Value of benefit

Free food and non-alcoholic beverages during office hours (Free meal Food and non-alcoholic beverages during office hours or by way of
in remote area or offshore installation area is not a taxable perquisite) vouchers is valued as the actual cost to the employer in excess of ₹ 50
per meal

Less: amount recovered from employee, if any

Tea and snacks provided during working hours is not taxable

Value of any gift or voucher or token other than gifts made in cash or Value of gift. In case the aggregate value of gift during the previous
convertible into money (e.g., gift cheques) on ceremonial occasion year is less than INR 5,000, then it is not a taxable perquisite.
Expenditure incurred on credit card or add on card including Actual expenditure to the employer is taxable
membership fee and annual fee
Less: amount recoverable from employee
 If it is incurred for official purpose and supported by necessary
documents (including a certificate from the employer) then it is not
taxable
Expenditure on club (other than health club or sports club or similar Actual expenditure incurred by the employer
facilities provided uniformly to all the employees)
Less: Amount recoverable from employee

If the expenditure is incurred exclusively for official purpose and

supported by necessary documents (including a certificate from the
employer) then it is not taxable.

Initial fee of corporate membership of a club is not a taxable

perquisite
Any other benefit or amenities or service or right or privilege provided Cost to the employer
by the employer other than telephone or mobile phone
Less: Amount recovered from the employee
Any sum paid to keep in effect an assurance on the life of an assessee Cost to the employer
or to keep in effect a contract for annuity**
Less: Amount recovered from the employee
Value of any benefit or amenity resulting from providing an employee Value at which such benefit is offered to the public Less: Amount
or member of his household for personal use or private journey or the recovered from the employee
movement of goods for personal use in the employer’s owned
transport where the employer is engaged in the carriage of goods or
passenger ***
Use of vehicle provided by the employer for the journey of the NIL. This is not to be regarded as benefit or amenity granted to
employee from his residence to office or any other place or work employee free of cost or at concessional rate
or vice versa.
**Will not apply if amount is paid to a recognised provident fund or approved superannuation fund or a Deposit Linked Insurance Fund
established under section 3G of the Coal Mines Provident Fund and Miscellaneous Provision Act, 1948 or under section 6C of the
Employees Provident Funds and Miscellaneous Provisions Act, 1952

***Does not apply to employees of an airline or railways

13. SUPERANNUATION FUND

Aggregate of employer’s contributions to Superannuation Fund, Provident Fund and National Pension Scheme (NPS), in excess of INR 7,50,000
and the annual accretions on such taxable contributions (computed in the prescribed manner) is subject to tax in the hands of the employee.

Any payment from an approved superannuation fund made on the death of the employee or in commutation of an annuity on his retirement at
a specified age or on his becoming incapacitated prior to such retirement is exempt from tax under section 10(13).

EXEMPTIONS

1. GRATUITY [SECTION 10(10)]

Section 10(10) (i) any death-cum-retirement gratuity received under the revised Pension Rules of the Central Government or, as the case may
be, the Central Civil Services (Pension) Rules, 1972, or under any similar scheme applicable to the members of the civil services of
the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons
not governed by the said Rules) or to the members of the all-India services or to the members of the civil services of a State or
holders of civil posts under a State or to the employees of a local authority or any payment of retiring gratuity received under the
Pension Code or Regulations applicable to the members of the defence services ;
(ii) any gratuity received under the Payment of Gratuity Act, 1972 (39 of 1972), to the extent it does not exceed an amount calculated
in accordance with the provisions of sub-sections (2) and (3) of section 4 of that Act ;
(iii) any other gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on
termination of his employment, or any gratuity received by his widow, children or dependants on his death, to the extent it does
not, in either case, exceed one-half month's salary for each year of completed service, calculated on the basis of the average salary
for the ten months immediately preceding the month in which any such event occurs, subject to such limit as the Central
Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to
the employees of that Government :
Provided that where any gratuities referred to in this clause are received by an employee from more than one employer in the
same previous year, the aggregate amount exempt from income-tax under this clause shall not exceed the limit so specified :
Provided further that where any such gratuity or gratuities was or were received in any one or more earlier previous years also and
the whole or any part of the amount of such gratuity or gratuities was not included in the total income of the assessee of such
previous year or years, the amount exempt from income-tax under this clause shall not exceed the limit so specified as reduced by
the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years.
Explanation.—In this clause, and in clause (10AA), "salary" shall have the meaning assigned to it in clause (h) of rule 2 of Part A of
the Fourth Schedule ;
Summary:

Gratuity is exempt only when it is received on - (a) retirement, or (b) becoming incapacitated prior to such retirement; or (c) resignation; or (d)
termination of services.

Exemption is also available for gratuity received by the widow, children or dependents of the employee on his death.

Particulars Amount of exemption

Gratuity received by Government & Local Authority Employees Fully exempt under section 10(10)(i)
Gratuity in case of employees covered by Payment of Gratuity Act, Lower of following amount is exempt:
1972
a. [15/26] x Salary last drawn x completed years of service or part
thereof in excess of 6 months
b. Maximum amount ₹ 20,00,000
c. Actually received
[Salary = Basic Pay + Dearness Allowance]

Gratuity in respect of any other employee Lower of following amount is exempt:

a. 1/2 x average salary x completed years of service (ignore

fraction)
b. Maximum amount ₹ 20,00,000
c. Actually received
[Salary = Basic Pay + Dearness Allowance + Commission based
on the % of Turnover

Notes:
1. Average Salary = Average salary drawn for last 10 months preceding month of retirement.
2. Gratuity received during continuation of service is not exempt under this section.
3. The aggregate exemption allowable to an employee in one or more previous years should not exceed the maximum amount (currently ₹
20 lakh)
4. Completed years of service include period of service under current employer as well as previous employer (if no gratuity has been
received from the former employers at that time)
2. PENSION: [SECTION 10(10A)]

Section 10 (10A) (i) any payment in commutation of pension received under the Civil Pensions (Commutation) Rules of the Central Government
or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence
or of civil posts under the Union (such members or holders being pe not governed by the said Rules) or to the members of the all-
India services or to the members of the defence services or to the members of the civil services of a State or holders of civil posts
under a State or to the employees of a local authority or a corporation established by a Central, State or Provincial Act ;
(ii) any payment in commutation of pension received under any scheme of any other employer, to the extent it does not exceed—
(a) in a case where the employee receives any gratuity, the commuted value of one-third of the pension which he is normally
entitled to receive, and
(b) in any other case, the commuted value of one-half of such pension,
such commuted value being determined having regard to the age of the recipient, the state of his health, the rate of interest and
officially recognised tables of mortality ;
(iii) any payment in commutation of pension received from a fund under clause (23AAB) ;

Government
Non-Government Employee Non-Government Employee From approved pension
Particulars
receiving gratuity not receiving gratuity fund of LIC or other Insurer
Employee
Uncommuted Pension Fully Taxable Fully Taxable Fully Taxable Fully Taxable
1/3rd of full value will be 1/2 of full value will be
Fully Exempt [section exempt exempt
Commuted Pension Fully Exempt
10(10A)(i)]
[section 10(10A)(ii)] [section 10(10A(iii)]
3. LEAVE SALARY (ENCASHMENT): [SECTION 10(10AA)]

Section 10 (10AA) (i) any payment received by an employee of the Central Government or a State Government as the cash equivalent of the
leave salary in respect of the period of earned leave at his credit at the time of his retirement whether on superannuation or
otherwise ;
(ii) any payment of the nature referred to in sub-clause (i) received by an employee, other than an employee of the Central
Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement
whether on superannuation or otherwise as does not exceed ten months, calculated on the basis of the average salary drawn by
the employee during the period of ten months immediately preceding his retirement whether on superannuation or otherwise,
subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to
the limit applicable in this behalf to the employees of that Government :
Provided that where any such payments are received by an employee from more than one employer in the same previous year, the
aggregate amount exempt from income-tax under this sub-clause shall not exceed the limit so specified :
Provided further that where any such payment or payments was or were received in any one or more earlier previous years also
and the whole or any part of the amount of such payment or payments was or were not included in the total income of the assessee
of such previous year or years, the amount exempt from income-tax under this sub-clause shall not exceed the limit so specified, as
reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or
years.
Explanation.—For the purposes of sub-clause (ii),—
the entitlement to earned leave of an employee shall not exceed thirty days for every year of actual service rendered by him as an
employee of the employer from whose service he has retired ;

Particulars Central or State Government Employee For any other employee

Encashment of leave during Fully Taxable. However relief can be taken Fully Taxable. However relief can be taken under
service under section 89 section 89
Encashment of leave during Fully Exempt Amount exempt shall be lower of following:
retirement
• Earned leave in months x Average Salary;
• Average monthly Salary x 10;
• Maximum Amount ₹ 3,00,000;
• Actual amount received

Average monthly salary for this purpose means average salary drawn in last 10 months immediately preceding the retirement.

The aggregate exemption allowable to an employee in one or more previous years should not exceed the maximum amount (currently ₹ 3
lakh)

Salary = Basic Pay + Dearness Allowance (forming part of retirement benefits) + Commission based on the % of turnover

Steps to determine period of leave in months:

1. of actual completed years of service

2. Number of days leave entitlement for each completed year of service as per rules of the employer (not exceeding 30 days for each year)
3. Gross total leave in days (step 1 x step 2)
4. Less: Leave enchased & availed during continuation of service (in days)
5. Period of earned leave (in days) (step 3 - step 4)
6. Period of leave in months (step 5/30)

4. RETRENCHMENT COMPENSATION [SECTION 10(10B)]

Section 10 (10B) any compensation received by a workman under the Industrial Disputes Act, 1947 (14 of 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 :
Provided that the amount exempt under this clause shall not exceed—
(i) an amount calculated in accordance with the provisions of clause (b) of section 25F of the Industrial Disputes Act, 1947 (14 of
1947) ; or
(ii) such amount, not being less than fifty thousand rupees, as the Central Government may, by notification in the Official Gazette,
specify in this behalf,
whichever is less :
Provided further that the preceding proviso shall not apply in respect of any compensation received by a workman in accordance
with any scheme which the Central Government may, having regard to the need for extending special protection to the workmen
in the undertaking to which such scheme applies and other relevant circumstances, approve in this behalf.
Explanation.—For the purposes of this clause—
(a) compensation received by a workman at the time of the closing down of the undertaking in which he is employed shall be
deemed to be compensation received at the time of his retrenchment ;
(b) compensation received by a workman, at the time of the transfer (whether by agreement or by operation of law) of the
ownership or management of the undertaking in which he is employed from the employer in relation to that undertaking to
a new employer, shall be deemed to be compensation received at the time of his retrenchment if—
(i) the service of the workman has been interrupted by such transfer ; or
(ii) the terms and conditions of service applicable to the workman after such transfer are in any way less favourable to the
workman than those applicable to him immediately before the transfer ; or
(iii) the new employer is, under the terms of such 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 ;
(c) the expressions "employer" and "workman" shall have the same meanings as in the Industrial Disputes Act, 1947 (14 of 1947);
Note:

Eligibility for Employee Retrenchment Compensation

An employee can be brought under the scanner of the retrenchment compensation process upon fulfilling the following requisites.

• The employee should be employed.

• Completion of 240 days in the last 12 months of service continuously by an employee is then mathematically calculated upon the year
of regular service.

Continuous Service of Retrenchment Compensation

Continuous service under Retrenchment Compensation refers to the performance of interruption-free service.

The following reasons are not considered an interruption of service: sickness, officially approved leave, lawful strikes, locking up of industries,
work halts, etc. In such cases, the cut back employee must be given his average pay of 15 days for his one year of regular service or provided
with 15 days of average pay for a year of regular employment or any part beyond that for a period of half a year.
Compensation received at time of retrenchment, is exempt from tax to the extent of the lowest of the following:

• 15 days' average pay for each completed year of service or any part in excess of six months
• Maximum amount ₹ 500,000
• Actual amount received

The “average pay” for the purpose of calculation of compensation is the average of the wages earned by the employee during the last twelve
months of his employment in the establishment.

5. VOLUNTARY RETIREMENT COMPENSATION [SECTION 10(10C)]

Sec 10 (10C) any amount received or receivable by an employee of—

(i) a public sector company ; or
(ii) any other company ; or
(iii) an authority established under a Central, State or Provincial Act ; or
(iv) a local authority ; or
(v) a co-operative society ; or
(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 (3 of 1956) ; or
(vii) an Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59
of 1961) ; or
(viia) any State Government; or
(viib) the Central Government; or
(viic) an institution, having importance throughout India or in any State or States, as the Central Government may, by notification in
the Official Gazette, specify in this behalf; or
(viii) such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf,
 on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the
case of a public sector company referred to in sub-clause (i), a scheme of voluntary separation, to the extent such amount does not
exceed five lakh rupees :
Provided that the schemes of the said companies or authorities or societies or Universities or the Institutes referred to in sub-clauses
(vii) and (viii), as the case may be, governing the payment of such amount are framed in accordance with such guidelines
(including inter alia criteria of economic viability) as may be prescribed54 :
Provided further that where exemption has been allowed to an employee under this clause for any assessment year, no exemption
thereunder shall be allowed to him in relation to any other assessment year :
Provided also that where any relief has been allowed to an assessee under section 89 for any assessment year in respect of any amount
received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under this clause
shall be allowed to him in relation to such, or any other, assessment year;

Notes:

Any amount received or receivable by an employee of

• A public sector company

• Any other company
• Authority established under a Central, State or Provincial Act
• A local authority
• A co-operative society
• A university established under a Central, State or Provincial Act or covered under the University Grants Commission Act
• Notified Indian Institute of Technology
• Notified Institute of Management
• Indian Institute of Foreign Trade, New Delhi
• Any State Government
• Any Central Government
 • Any other Institute notified by Central Government

at the time of his voluntary retirement under a scheme framed in accordance with guidelines prescribed by Rule 2BA is exempt up to specified
limits.

Exemption is least of the following:

• Actual amount received under the Voluntary Retirement Scheme.

• ₹ 5 lakhs (to be reduced by total exemptions claimed in the past) in total from one or more employer

6. TAX PAID BY EMPLOYER ON BEHALF OF EMPLOYEE [SECTION 10(10CC)]

Tax paid by the employer on behalf of the employee is ordinarily considered to be a perquisite in the hands of the employee. However, tax paid
by the employer, at his option, on behalf of the employee, on a perquisite provided to the employee other than by way of monetary payment
- e.g. motor car, accommodation, etc., shall be exempt in the hands of employee. Such tax shall not be allowed as a deduction to the employer
in terms of Section 40(a)(v).
PROVIDENT FUND AND NPS - COMPARATIVE ANALYSIS

Lump sum payment received

Employer’s Employee’s
at the time of retirement or
Particulars Income credited
termination of service or
contribution contribution
withdrawal
Fully exempt From financial year (FY) 2021-22, if there is
no contribution by the employer (i.e., the government),
Statutory employees of the government sector can contribute a
provident Eligible for deduction maximum of INR 5,00,000 into their provident fund
Not taxable Exempt under section 10(11)
fund/Government under section 80C accounts in a financial year to earn tax-exempt interest.
provident fund The interest on the contribution over INR 500,000 would
be taxable as income from other sources. The manner of
computing such interest is prescribed in Rule 9D
Exempt from tax under
section 10(12)
Exempt up to 9.5%* Further, from FY 2021-22, interest
accrued during the previous year on employee
Not taxable Subject to conditions: not
Recognised Eligible for deduction contributions to provident fund exceeding INR 250,000
up to 12% of taxable if employee retires
provident fund under section 80C would be taxable as income from other sources. The
salary* after 5 years of service or
manner of computing such interest is prescribed in
due to inability to work.
Rule 9D.
Otherwise treated as URPF
Unrecognised Not eligible for Employee’s contribution
provident fund Not taxable deduction under Not taxable at the time of credit exempt from tax and
(URPF) section 80C interest thereon is taxable
 under the head ‘income
from other sources’.

Employer’s contribution and

interest thereon is taxable as
‘Profits in lieu of salary’
under the head “Salaries”
Exempt from tax Further, from FY 2021-22, interest
accrued during the previous year on employee
contributions to public provident fund exceeding INR
Employer 250,000 would be taxable as income from other
Public provident Eligible for deduction
does not sources. The manner of computing such interest is Exempt under section 10(11)
fund under section 80C
contribute prescribed in Rule 9D. However, since contributions
exceeding INR 1,50,000 per financial year are
currently not allowed in a PPF account, this provision
would not apply.
Taxable* as 60% of NPS corpus tax
salary and exempt on lump sum
deductible withdrawal on closure of
Eligible for deduction
under account.
under sections
section
80CCD(1)
80CCD (2) up Amount of corpus utilised
National pension
to 14% of Exempt from tax* for purchase of annuity is
system [10% of salary] and
employee’s also exempt.
80CCD(1B)
salary in case
No tax will be levied on
[₹ 50,000]
of partial withdrawal, not
government exceeding 25% of
employees contribution, from NPS. The
 and 10% in 25% withdrawal is permitted
case of all not on corpus but on
non- contribution.
government
employees. Further, NPS subscriber has a
one-time option to transfer
funds from recognised
provident fund/
superannuation fund to his
Tier I NPS account. This
amount so transferred will
neither be treated as income
of the year of transfer nor
will be eligible for any claim
of contribution/deduction.
*Employer’s contributions to Provident Fund, National Pension Scheme (NPS) and Superannuation Fund in excess of INR 7,50,000 in aggregate are
taxable. Further, the annual accretions on such taxable contributions, will also be subject to tax. The manner in which it is to be computed has been
prescribed in new Rule 3B to the Income-tax Rules, 1962 (Rules). As per the aforesaid, computation has to be made as follows:

TP= (PC/2)*R + (PC1+ TP1)*R

Where,

TP= Taxable perquisite under sub-clause (viia) of clause (2) of section 17 of the Act for the current previous year;
TP1 = Aggregate of taxable perquisite under sub-clause (viia) of clause (2) of section 17 of the Act for the previous year or years commencing on or
after 1st day April, 2020 other than the current previous year (See Note);
PC= Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs. 7.5 lakh to the specified fund or scheme
during the previous year;
PC1 = Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs. 7.5 lakh to the specified fund or scheme for
the previous year or years commencing on or after 1st day April, 2020 other than the current previous year
(See Note);
R= I/ Favg ;
I=Amount or aggregate of amounts of income accrued during the current previous year in the specified fund or scheme account;
Favg = (Amount or aggregate of amounts of balance to the credit of the specified fund or scheme on the first day of the current previous Year +
Amount or aggregate of amounts of balance to the credit of the specified fund or scheme on the last day of the
current previous year)/2.

Explanation. — For the purposes of this rule, “specified fund or scheme” shall mean a fund or scheme referred to in sub-clause (vii) of clause (2) of
section 17 of the Act.

Note: Where the amount or aggregate of amounts of TP1 and PC1 exceeds the amount or aggregate of amounts of balance to the credit of the
specified fund or scheme on the first day of the current previous year, then the amount in excess of the amount or aggregate of amounts of the said
balance shall be ignored for the purpose of computing the amount or aggregate of amounts of TP1 and PC1.”.