INCOME FROM SALARIES

An income received by an assessee mainly classified into five types as follows:-

1. Income from salary sec 15-17
2. Income from house property sec 22-27
3. Income from Business or profession sec 28-44
4. Income from capital gains sec 45-55A
5. Income from other sources sec 56-59
Salary received by an employee is taxable under head income from salary. Generally salary
means remuneration received from an employee from his employer for service rendered by
him.
In order to understand the computation of income under the head “salaries”, the following
relevant concepts need to be understood first:
1. Employer-employee relationship –
An income can be taxed under the head “salaries” only if there is an employer employee
relationship between the payer and payee. If this relationship does not exist, then, the income
will not be taxable as salary income; it will be taxable under income from other sources.
Employer may be an individual, firm, association of persons, company, local authority,
Central government, state government, etc. Likewise, employer may be operating in India or
outside India. The employee may be a full-time employee or a part-time employee.
MPs or MLAs are not treated as employees of the Government. Thus, remuneration received
by them is not taxable under the head “Salaries” but taxable as “Income from other sources”.
However, pay and allowances received by the Chief Minister of a State are assessable as
salary and not as income from other sources, in view of the provisions of article 164(5) of the
Constitution.
Any salary, bonus, commission or remuneration, by whatever name called, due to/ received
by, a partner of a firm from the firm shall not be taxable under the head “Salaries” because
there is no employer-employee relationship between firm and its partners. Such
remuneration, however, is taxable under the head “Profits and gains from business or
profession” in the hands of partners.
2. No difference between salary and wages –
Conceptually, there is no difference between ‘salary’ and ‘wages’, both being a payment for
work done or services rendered.
3. Arrears of salary –
Salary due to an assessee in the earlier years, which was neither paid nor was charged to tax
in those years, will have to treated as ‘arrears of salary’ and thus, taxable under the head
“Salaries”.

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4. Advance salary –
Salary received in advance is taxable in the year of receipt. It will not be taxable again in the
year in which it becomes due.
5. Salary paid by foreign Government –
Salary paid by a foreign Government to its employees serving in India is taxable under the
head “Salaries”.
6. Salary from more than one employer –
Salary received by an employee from more than one employer during the same previous year
is taxable under the head “Salaries”.
7. Salary from former employer, present employer or prospective employer –
Salary received (or due) during the previous year is chargeable to tax under the head
“Salaries” irrespective of the fact whether it is received from a former, present or prospective
employer.
8. Tax-free salary –
If salary is paid tax-free by the employer, the employee has to include in his taxable income
not only the salary received but also the amount of tax paid by the employer on this salary
income of the employee.
9. Foregoing of salary –
Once salary is earned by the employee, it becomes taxable in his hands though he may me
subsequently waive the right to receive the same from his employer. Such voluntary waiver
or foregoing by an employee of salary due to him is merely an application of income and is
chargeable to tax under the head “Salaries”.
10. Place of accrual –
Income under the head “Salaries” is deemed to accrue or arise at the place where the service
(in respect of which it accrues) is rendered. If the services are rendered in India and if the
salary in respect of such service is received outside India, it will be treated as an income
which is deemed to accrue or arise in India.
Similarly, if a person, who after rendering services in India, retires and settles abroad,
receives any pension on account of the same, such pension shall be an income which is
deemed to accrue or arise in India because the services on account of which pension accrues,
were rendered in India.
There is, however, an exception to the above rule. Salary payable by the Government of India
to a citizen of India for services outside India is treated as income deemed to accrue or arise
in India even though services are rendered outside India.
11. Method of accounting not relevant –

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Salary is taxable on receipt or due basis, whichever is earlier regardless of the fact whether
books of account, in respect of salary income, are maintained by the assessee on mercantile
basis or cash basis.
Basis of charge
Under section 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 actually 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; and
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.
Meaning of salary [Section 17(1)] –
Salary includes –
a. wages;
b. any annuity or pension;
c. any gratuity;
d. any fees, commissions, perquisites or profits in lieu of or in addition to any salary or
wages;
e. any advance of salary;
f. any payment received by an employee in respect of any period of leave not availed by
him;
g. employer’s contribution towards Recognized Provident Fund (RPF) in excess of 12%
of employee’s salary and interest credited to RPF in excess of 9.5% p.a.;
h. transferred balance in a recognized provident fund to the extent it is taxable; and
i. the contribution made by the Central Government (or any other employer) in the
previous year, to the account of an employee under a notified pension scheme referred to
in section 80CCD.
(1) Wages
In common parlance, the term “wages” means fixed regular payment earned for work or
services. The words “wages”, “salary”, “basic salary” are used interchangeably. Moreover,
the payments in the form of Bonus, Allowances etc. made to the employee are also included
within the meaning of salary. Under the Income-tax Act, there are certain payments made
which are fully taxable, partly taxable and fully exempt. For Example, wages, salary, bonus,
dearness allowance etc. are fully taxable payments. Whereas monetary benefits in the form of
allowances such as House Rent Allowance, conveyance allowance etc. are partially taxable.

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(2)Allowances
Allowances are fixed monetary amount paid by the employer to the employee for meeting
some particular expenses. These are generally fully taxable and thus, included to compute
gross salary unless a specific exemption has been provided in respect of that particular
allowance which is received.
Allowances are divided under three categories for the purpose of taxability are discussed
below:
ALLOWANCES
FULLY TAXABLE PARTLY TAXABLE FULLY EXEMPTED
(i) Entertainment Allowance (i) House Rent (i) Allowances to High
Allowance [u/s10(13A)]
(ii) Special Allowances Court Judges
[u/s 10(14)]
(ii) Dearness Allowance (ii) Allowance paid by the
(iii) Overtime Allowance United Nations
(iv) Fixed Medical Organization.
Allowance (iii) Compensatory
(v) City Compensatory Allowance received by
Allowance (to meet a judge
increased cost of living in
cities) (iv) Sumptuary allowance
granted to High Court
or Supreme Court
(vi) Interim Allowance (v) Allowance granted to
(vii) Servant Allowance Government employees
(viii) Project Allowance outside India.
(ix) Tiffin/Lunch/Dinner
Allowance
(x) Any other cash allowance

xi) Warden Allowance

(xii) Non-practicing

(B) Allowances which are partially taxable

1. House rent allowance [Section 10(13A)]: HRA is a special allowance specifically granted
to an employee by his employer towards payment of rent for residence of the employee. HRA
granted to an employee is exempt to the extent of least of the following:
Metro Cities (i.e. Delhi, Kolkata, Mumbai, Other Cities
Chennai)
1) HRA actually received. 1) HRA actually received.
2) Rent paid -10% of salary for the relevant 2) Rent paid -10% of salary for the relevant
period period
3) 50% of salary for the relevant period 3) 40% of salary for the relevant period

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Notes: 1. Exemption is not available to an assessee who lives in his own house, or in a house
for which he has not incurred the expenditure of rent.
2. Salary for this purpose means basic salary, dearness allowance, if provided in terms of
employment and commission as a fixed percentage of turnover.
3. Relevant period means the period during which the said accommodation was occupied by
the assessee during the previous year.
Problem: 1. Mr. Raj Kumar has the following receipts from his employer:
(1) Basic pay Rs 3,000 p.m.
(2) Dearness allowance (D.A.) Rs 600 p.m.
(3) Commission Rs 6,000 p.a.
(4) Motor car for personal use (expenditure met by the employer) Rs 500 p.m.
(5) House rent allowance Rs 900 p.m.
Find out the amount of HRA eligible for exemption to Mr. Raj Kumar assuming that he paid
a rent of Rs 1,000 p.m. for his accommodation at Kanpur. DA forms part of salary for
retirement benefits.
Solution: Exemption shall be least of the following three limits:
(a) The actual amount received. (900 × 12) 10,800
(b) Rent paid in excess of 10% of his salary
= Rent Paid - 10% of salary for the relevant period
= ( 1,000×12) - 10% of [( 3,000+ 600 ) × 12] = 12,000 - 4,320 7,680
(c) 40% salary as his accommodation is situated at Kanpur
= 40% of [( 3,000+ 600) × 12] 17,280
HRA received 10,800
Less: Exempt under section 10(13A) [Note] 7,680
Taxable HRA 3,120

Note: For the purpose of exemption under section 10(13A), salary includes dearness
allowance only when the terms of employment so provide, but excludes all other allowances
and perquisites.
2. Special allowances to meet expenses relating to duties or personal expenses [Section
10(14)]
A. When exemption depends upon actual expenditure by the employee – Sec 10 (14) (i)
In the case of given below six allowances, lower of the following is allowed as deduction:
The amount of the allowance; or the amount utilized for the specific purpose for which
allowance is given.
These allowances are as follows –
1. Travelling allowance/ Transfer allowance –

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An allowance (by whatever name called) granted to meet the cost of travel on tour or on
transfer (including any sum paid in connection with transfer, packing and transportation of
personal effects on such transfer).
2. Conveyance allowance –
Conveyance allowance is exempt from tax to the extent it is utilized for performance of
official duties. It is an allowance which is granted to meet the expenditure on conveyance in
performance of duties of an office. It may be noted that any expenditure for covering the
journey between office and residence is not treated as expenditure in performance of duties of
the office.
3. Daily allowance –
An allowance whether granted on tour or for the period of journey in connection with
transfer, to meet the ordinary daily charges incurred by an employee on account of absence
from his normal place of duty.
4. Helper allowance –
An allowance (by whatever name called) to meet the expenditure on a helper where such
helper is engaged for the performance of official duties.
5. Research/ Academic allowance –
An allowance (by whatever name called) granted for encouraging the academic research and
other professional ethics.
6. Uniform allowance –
An allowance (by whatever name called) to meet the expenditure on the purchase or
maintenance of uniform for wear during the performance of duties of an office.
B. When exemption does not depend upon the actual expenditure –Sec 10 (14) (ii)
In case of given below allowances, the amount of exemption does not depend upon the
expenditure actually incurred by the employee. Amount of exemption is –
SI. NAME OF ALLOWANCE EXTENT TO WHICH
N ALLOWANCE IS
O EXEMPT
1. Any Special Compensatory Allowance in the nature of Rs.800 or 7,000 or 300
Special Compensatory (Hilly Areas) Allowance or per month depending
High Altitude Allowance or Uncongenial Climate upon the specified
Allowance or Snow Bound Area Allowance or locations
Avalanche Allowance.
2. Any Special Compensatory Allowance in the nature of Rs.1,300 or 1,100 or
border area allowance or remote locality allowance or 1,050 or 750 or 300 or
difficult area allowance or disturbed area allowance. 200 per month depending
upon the specified
Locations.
3. Special Compensatory (Tribal Areas / Schedule Rs. 200 per month.
Areas / Agency Areas) Allowance

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 4. Any allowance granted to an employee working in any 70% of such allowance
transport system to meet his personal expenditure upto a maximum of
during his duty performed in the course of running Rs.10, 000 per month.
such transport from one place to another, provided
that such employee is not in receipt of daily allowance
5. Children Education Allowance Rs.100 per month per
child upto a maximum of
two children.
6. Any allowance granted to an employee to meet Rs.300 per month per
the hostel expenditure on his child child upto a maximum of
two children.
7. Compensatory Field Area Allowance Rs. 2,600 per month in
specified areas.
8. Compensatory Modified Field Area Rs.1, 000 per month in
Allowance specified areas.
9. Any special allowance in the nature of Rs.3,900 per month
counterinsurgency allowance granted to the members
of the armed forces operating in areas away from their
permanent locations. Any assessee claiming
exemption in respect of allowances mentioned at
serial numbers 7,8 and 9 shall not be entitled to
exemption in respect of the allowance referred to at
serial number 2.
10. Any transport allowance granted to an employee Rs.1,600 per month
(other than those referred to in Sl. No. 11 below) to
meet his expenditure for the purpose of commuting
between the place of his residence and the place of his
duty
11. Any transport allowance granted to an Rs.3, 200 per month.
employee who is blind or deaf and dumb
or orthopedically handicapped with disability
of the lower extremities of the body, to meet
his expenditure for commuting between his
residence and place of duty
12. Underground Allowance would be granted to an Rs.800 per month
employee who is working in uncongenial, unnatural
climate in underground mines. This is applicable to
whole of India.

(C) Allowances which are fully exempt

(1) Allowance to High Court Judges: Any allowance paid to a Judge of a High Court under
section 22A (2) of the High Court Judges (Conditions of Service) Act, 1954 is not taxable.
(2) Allowance received from United Nations Organisation (UNO): Allowances paid by
the UNO to its employees is not taxable by virtue of section 2 of the United Nations
(Privileges and Immunities) Act, 1947.
(3) Compensatory allowance under Article 222(2) of the Constitution:

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Compensatory allowance received by judge under Article 222(2) of the Constitution is not
taxable since it is neither salary not perquisite1.
(4) Sumptuary allowance: Sumptuary allowance given to High Court Judges under section
22C of the High Court Judges (Conditions of Service) Act, 1954 and Supreme Court Judges
under section 23B of the Supreme Court Judges (Conditions of Service) Act, 1958 is not
chargeable to tax.
(5) Allowances payable outside India [Section 10(7)]
(6)Exemption of specified allowances and perquisites paid to Chairman or a retiredChairman
or any other member or retired member of the UPSC [Section 10(45)]
Perquisite
Perquisite may be defined as any casual emolument or benefit (monetary or non-monetary)
attached to an office or position in addition to salary or wages.
Types of Perquisites
Perquisites are mainly divided into three categories for the purpose of taxability:
1. Perquisites which are taxable for all employees.
2. Perquisites which are taxable only for specified employees.
3. Perquisites which are exempt for all employees
1. Perquisites which are taxable for all employees
The following Perquisites received by employee from his employer taxable in all the cases.
a. the value of rent-free accommodation provided to the assessee by his employer;
b. the value of any concession in the matter of rent respecting any accommodation provided
to the assessee by his employer;
c. the value of any benefit or amenity granted or provided free of cost or at concessional rate
in any of the following cases:
i. by a company to an employee who is a director thereof;
ii. by a company to an employee, being a person who has substantial interest in the company;
iii. by any employer (including a company) to an employee to whom provisions of (i) and (ii)
above do not apply and whose income under the head “Salaries” exclusive of the value of all
benefits or amenities not provided for by way of monetary benefits, exceeds Rs. 50,000;
d. any sum paid by an employer in respect of any obligation which but for such payment
would have been payable by the assessee;
e. any sum payable by the employer, whether directly or through a fund other than a
recognized provident fund or approved superannuation fund or a deposit-linked insurance
fund, to effect an assurance on the life of the assessee or to effect a contract for an annuity;

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f. the value of any specified security or sweat equity shares allotted or transferred, directly or
indirectly, by the employer, or former employer, free of cost or at concessional rate to the
assessee;
g. the amount of any contribution to an approved superannuation fund by the employer in
respect of the assessee, to the extent it exceeds Rs. 1,00,000;
h. the value of any other fringe benefits or amenity as may be provided.
2. Perquisites which are taxable only for specified employees.
Specified employee –
The following employees are known as “specified employee”:
1. A director-employee– An employee, who is a director in the employer-company at any
time during the previous year, is a specified employee of the company in which he is a
director.
2. An employee who has substantial interest in the employer-company – An employee
who has a substantial interest in the employer-company at any time during the previous year
is a specified employee of the company in which he has substantial interest. A person has
substantial interest in the employer-company, if he is a beneficial owner of equity shares
carrying 20% or more voting power in the employer-company.
3. An employee drawing in excess of Rs. 50,000 –An employee (not covered by the above
two cases), whose income chargeable to tax under the head “Salaries” (exclusive of the value
of all benefits or amenities not provided by way of monetary payments) exceeds Rs. 50,000,
is a specified employee. For computing the sum of Rs. 50,000, the following are excluded or
deducted:
a. all non-monetary benefits;
b. monetary benefits which are not taxable under section 10 (for example, house rent
allowance to the extent exempt under section 10(13A) is excluded); and
c. deduction on account of entertainment allowance and professional tax. Where salary is
received from more than one employer, the aggregate salary from these employers will have
to be taken into account for the purpose of determining the aforesaid monetary ceiling.
Perquisites taxable only in the hands of a specified employee –
The following perquisites are taxable only in the hands of specified employees:
 Service of a sweeper, gardener, watchman or personal attendant
 Supply of gas, electricity or water for household purposes
 Education facility to employee’s family members
 Leave travel concession (LTC)
 Medical facility
 Car or any other automotive conveyance
 Transport facility by a transport undertaking
3. Perquisites exempt from tax in all cases:

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The following perquisites are exempt from tax in all cases -
(1) Telephone provided by an employer to an employee at his residence;
(2) Transport facility provided by an employer engaged in the business of carrying of
passengers or goods to his employees either free of charge or at concessional rate;
(3) Privilege passes and privilege ticket orders granted by Indian Railways to its employees;
(4) Perquisites allowed outside India by the Government to a citizen of India for rendering
services outside India;
(5) Sum payable by an employer to a RPF or an approved superannuation fund or deposit-
linked insurance fund established under the Coal Mines Provident Fund or the Employees’
Provident Fund Act;
(6) Employer’s contribution to staff group insurance scheme;
(7) Leave travel concession;
(8) Payment of annual premium by employer on personal accident policy effected by him on
the life of the employee;
(9) Refreshment provided to all employees during working hours in office premises;
(10) Subsidized lunch or dinner provided to an employee;
(11) Recreational facilities, including club facilities, extended to employees in general i.e.,
not restricted to a few select employees;
Sl. Circumstances- 2 In case of unfurnished In case of furnished
no accommodation -3 accommodation -4
1 Where the accommodation is License fee determined by The value of perquisite as
provided by the Central the Central Government or determined under column (3)
Government or any State any State Government in and increased by 10% per
Government to the employees respect of accommodation annum of the cost of furniture
either holding office or post in in accordance with the (including television sets, radio
connection with the affairs of rules framed by such sets, refrigerators, other
the Union or of such State. Government as reduced by household appliances, air-
the rent actually paid by conditioning plant or
the employee equipment).
If such furniture is hired from a
third party, the actual hire
charges payable for the same
as reduced by any charges paid
or payable for the same by the
employee during the previous
year should be added to the
value of the perquisite
determined under column (3).
2 Where the accommodation is i) 15% of salary in cities The value of perquisite as
provided by any other having population determined under column (3)
employer. exceeding 25 lakhs as per and increased by 10% per
(a) Where the accommodation 2001 census; annum of the cost of furniture
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 is owned by the employer. (ii) 10% of salary in (including television sets,
cities having population refrigerators, other household
exceeding 10 lakhs but not appliances, air-conditioning
exceeding 25 lakhs as per plant or equipment or other
2001 census; similar appliances or gadgets).
(iii) 7.5% of salary in other If such furniture is hired from a
areas, in respect of the third party, the actual hire
period during which the charges payable for the same
said accommodation was as reduced by any charges paid
occupied by the employee or payable for the same by the
during the previous year as employee during the previous
reduced by the rent, if any, year, should be added to the
actually paid by the value of perquisite determined
employee. under column (3) in both the
cases.
(b) Where the accommodation Actual amount of lease
is taken on lease or rent by the rental paid or payable by
employer. the employer or 15% of
salary, whichever is lower,
as reduced by the rent, if
any, actually paid by the
employee
3. Where the accommodation is 24% of salary paid or payable
provided by any employer, for the previous year or the
whether Government or Not applicable actual charges paid or payable
any other employer, in a hotel. to such hotel, which is lower,
for the period during which
such accommodation is
provided as reduced by the
rent, if any, actually paid or
payable by the employee.
However, where the employee
is provided such
accommodation for a period
not exceeding in aggregate
fifteen days on his transfer
from one place to another,
there would be no perquisite.
(12) Amount spent by the employer on training of employees or amount paid for refresher
management course including expenses on boarding and lodging;
13) Medical facilities subject to certain prescribed limits.
(14) Rent-free official residence provided to a Judge of a High Court or the Supreme Court;
(15) Rent-free furnished residence including maintenance provided to an Officer of
Parliament, Union Minister and a Leader of Opposition in Parliament;
(16) Conveyance facility provided to High Court Judges under section 22B of the High Court
Judges.

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Valuation of Perquisites
For the purpose of computing the income chargeable under the head “Salaries”, the value of
perquisites provided by the employer directly or indirectly to the employee or to any member
of his household by reason of his employment shall be determined in accordance with new
Rule 3.
1. Valuation of residential accommodation [Sub-rule (1)] - The value of residential
accommodation provided by the employer during the previous year shall be determined in the
following manner –
Notes:
(1) If an employee is provided with accommodation, on account of his transfer from one
place to another, at the new place of posting while retaining the accommodation at the other
place, the value of perquisite shall be determined with reference to only one such
accommodation which has the lower perquisite value, as calculated above, for a period not
exceeding 90 days and thereafter, the value of perquisite shall be charged for both such
accommodations.
(2) Any accommodation provided to an employee working at a mining site or an on-shore oil
exploration site or a project execution site, or a dam site or a power generation site or an off-
shore site would not be treated as a perquisite, provided it satisfies either of the following
conditions -
(i) the accommodation is of temporary nature, has plinth area not exceeding 800 square feet
and is located not less than eight kilometers away from the local limits of any municipality or
a cantonment board; or
(ii) the accommodation is located in a remote area i.e., an area that is located at least 40 kms
away from a town having a population not exceeding 20,000 based on latest published all-
India census
3) Where the accommodation is provided by the Central Government or any State
Government to an employee who is serving on deputation with anybody or undertaking under
the control of such Government,-
(i) The employer of such an employee shall be deemed to be that body or undertaking where
the employee is serving on deputation; and
(ii) The value of perquisite of such an accommodation shall be the amount calculated in
accordance with Sl. No. (2)(a) of the above table, as if the accommodation is owned by the
employer.
(4) “Accommodation” includes a house, flat, farm house or part thereof, or accommodation in
a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating
structure.
(5) “Hotel” includes licensed accommodation in the nature of motel, service apartment or
guest house.

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2. Motor Car [Sub-rule (2) of Rule 3] - The value of perquisite by way of use of motor car
to an employee by an employer shall be determined in the following manner –
Sl. Circumstances Where cubic Where cubic
no. capacity of engine capacity of engine
does not exceed 1.6 exceeds 1.6 liters
liters
1. a. Where the motor car is owned or Not a perquisite Not a perquisite
hired by the employer and – provided the provided the
is used wholly and exclusively in documents specified documents specified
the performance of his official in Note (2) below the in Note (2) below the
duties table are maintained table are maintained
by the employer. by the employer.
Actual amount of Actual amount of
expenditure incurred expenditure incurred
b. is used exclusively for the private by the employer on by the employer on
or personal purposes of the the running and the running and
employee or any member of his maintenance of motor maintenance of motor
household and the running and car during the car during the relevant
maintenance expenses are met or relevant previous previous year
reimbursed by the employer; year including including
remuneration, if any, remuneration, if any,
paid by the employer paid by the employer
to the chauffeur as to the chauffeur as
increased by the increased by the
amount representing amount representing
normal wear and tear normal wear and tear
of the motor car and of the motor car and as
as reduced by any reduced by any
amount charged from amount charged from
the employee for the employee for such
such use use
c. is used partly in the performance of
duties and partly for private or
personal purposes of his own or any
member of his household and-
(i) the expenses on Rs.1,800 (plus Rs. Rs.2,400 (plus Rs.
maintenance and running 900, if chauffeur is 900, if chauffeur is
are met or reimbursed by also provided to run also provided to run
the employer the motor car) the motor car)
(ii) (ii) The expenses on Rs.600 (plus Rs. 900, Rs. 900 (plus Rs. 900,
running and maintenance if chauffeur is also if chauffeur is also
for private or personal use provided by the provided by the
are fully met by the employer to run the employer to run the
assessee. motor car motor car)

2. Where the employee owns a motor

car but the actual running and
maintenance charges (including
remuneration of the chauffeur, if

13
 any) are met or reimbursed to him
by the employer and –
a such reimbursement is for the use Not a perquisite, Not a perquisite,
of the vehicle wholly and provided the provided the
exclusively for official purposes documents specified documents specified
in Note (2) below the in Note (2) below the
table are maintained table are maintained
by the employer by the employer
b Such reimbursement is for the use The actual amount of The actual amount of
of the vehicle partly for official expenditure incurred expenditure incurred
purposes and partly for personal or by the employer as by the employer as
private purposes of the employee or reduced by the reduced by the amount
any member of his household. amount specified in specified in Sl. No. (1)
Sl. No. (1)(c)(i) (c)(i) Above (Also see
Above (Also see note note (2) below this
(2) below this table). table).

3. Where the employee owns any

other automotive conveyance but
the actual running and maintenance
charges are met or reimbursed to
him by the employer and
a such reimbursement is for the use Not a perquisite Not applicable.
of the vehicle wholly and provided the
exclusively for official purposes documents specified
in the note (2) below
the table are
maintained by the
employer.

b such reimbursement is for the use The actual amount of

of vehicle partly for official expenditure incurred
purposes and partly for personal or by the employer as
private purposes of the employee reduced by the
amount of ` 900.
(Also see note (2)
below the table)

Notes: (1) Where one or more motor-cars are owned or hired by the employer and the
employee or any member of his household are allowed the use of such motor-car or all of any
of such motor-cars (otherwise than wholly and exclusively in the performance of his duties),
the value of perquisite shall be the amount calculated in respect of one car as if the employee
had been provided one motor-car for use partly in the performance of his duties and partly for
his private or personal purposes and the amount calculated in respect of the other car or cars
as if he had been provided with such car or cars exclusively for his private or personal
purposes.

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(2) Where the employer or the employee claims that the motor-car is used wholly and
exclusively in the performance of official duty or that the actual expenses on the running and
maintenance of the motor-car owned by the employee for official purposes is more than the
amounts deductible in Sl. No. 2(ii) or 3(ii) of the above table, he may claim a higher amount
attributable to such official use and the value of perquisite in such a case shall be the actual
amount of charges met or reimbursed by the employer as reduced by such higher amount
attributable to official use of the vehicle provided that the following conditions are fulfilled :-
(a) The employer has maintained complete details of journey undertaken for official purpose
which may include date of journey, destination, mileage, and the amount of expenditure
incurred thereon;
(b) The employer gives a certificate to the effect that the expenditure was incurred wholly
and exclusively for the performance of official duties.
(3) For computing the perquisite value of motor car, the normal wear and tear of a motor-car
shall be taken at 10% per annum of the actual cost of the motor-car or cars.
3. Valuation of benefit of provision of domestic servants [Sub-rule (3) of Rule 3]
(i) The value of benefit to the employee or any member of his household resulting from the
provision by the employer of the services of a sweeper, a gardener, a watchman or a personal
attendant, shall be the actual cost to the employer.
(ii) The actual cost in such a case shall be the total amount of salary paid or payable by the
employer or any other person on his behalf for such services as reduced by any amount paid
by the employee for such services.
4. Valuation of gas, electricity or water supplied by employer [Sub-rule (4) of Rule 3]
(i) The value of the benefit to the employee resulting from the supply of gas, electric energy
or water for his household consumption shall be determined as the sum equal to the amount
paid on that account by the employer to the agency supplying the gas, electric energy or
water.
(ii) Where such supply is made from resources owned by the employer, without purchasing
them from any other outside agency, the value of perquisite would be the manufacturing cost
per unit incurred by the employer.
(iii) Where the employee is paying any amount in respect of such services, the amount so
paid shall be deducted from the value so arrived at.
5. Valuation of free or concessional educational facilities [Sub-rule (5) of Rule 3]
(i) The value of benefit to the employee resulting from the provision of free or concessional
educational facilities for any member of his household shall be determined as the sum equal
to the amount of expenditure incurred by the employer in that behalf or where the educational
institution is itself maintained and owned by the employer or where free educational facilities
for such member of employees’ household are allowed in any other educational institution by
reason of his being in employment of that employer, the value of the perquisite to the
employee shall be determined with reference to the cost of such education in a similar
institution in or near the locality.

15
(ii) Where any amount is paid or recovered from the employee on that account, the value of
benefit shall be reduced by the amount so paid or recovered.
(iii) However, where the educational institution itself is maintained and owned by the
employer and free educational facilities are provided to the children of the employee or where
such free educational facilities are provided in any institution by reason of his being in
employment of that employer, there would be no perquisite if the cost of such education or
the value of such benefit per child does not exceed ` 1,000 p.m.
6 Free or concessional tickets [Sub-rule (6) of Rule 3] - The value of any benefit or
amenity resulting from the provision by an employer who is engaged in the carriage of
passengers or goods, to any employee or to any member of his household for personal or
private journey free of cost or at concessional fare, in any conveyance owned, leased or made
available by any other arrangement by such employer for the purpose of transport of
passengers or goods shall be taken to be the value at which such benefit or amenity is offered
by such employer to the public as reduced by the amount, if any, paid by or recovered from
the employee for such benefit or amenity.
However, there would be no such perquisite to the employees of an airline or the railways.
7 Valuation of other fringe benefits and amenities [Sub-rule (7) of Rule 3] - Section 17(2)
(viii) provides that the value of any other fringe benefit or amenity as may be prescribed
would be included in the definition of perquisite. Accordingly, the following other fringe
benefits or amenities are prescribed and the value thereof shall be determined in the manner
provided hereunder:-
(i) Interest-free or concessional loan [Sub-rule 7(i) of Rule 3]
(a) The value of the benefit to the assessee resulting from the provision of interest-free or
concessional loan for any purpose made available to the employee or any member of his
household during the relevant previous year by the employer or any person on his behalf shall
be determined as the sum equal to the interest computed at the rate charged per annum by the
State Bank of India, as on the 1st day of the relevant previous year in respect of loans for the
same purpose advanced by it on the maximum outstanding monthly balance as reduced by the
interest, if any, actually paid by him or any such member of his household. “Maximum
outstanding monthly balance” means the aggregate outstanding balance for each loan as on
the last day of each month.
(b) However, no value would be charged if such loans are made available for medical
treatment in respect of prescribed diseases (like cancer, tuberculosis, etc.) or where the
amount of loans are petty not exceeding in the aggregate ` 20,000.
(c) Further, where the benefit relates to the loans made available for medical treatment
referred to above, the exemption so provided shall not apply to so much of the loan as has
been reimbursed to the employee under any medical insurance scheme.
(ii) Travelling, touring and accommodation [Sub-rule 7(ii) of Rule 3]
(a) The value of travelling, touring, accommodation and any other expenses paid for or borne
or reimbursed by the employer for any holiday availed of by the employee or any member of

16
his household, other than leave travel concession or assistance, shall be determined as the
sum equal to the amount of the expenditure incurred by such employer in that behalf.
(b) Where such facility is maintained by the employer, and is not available uniformly to all
employees, the value of benefit shall be taken to be the value at which such facilities are
offered by other agencies to the public.
(c) Where the employee is on official tour and the expenses are incurred in respect of any
member of his household accompanying him, the amount of expenditure so incurred shall
also be a fringe benefit or amenity.
(d) However, where any official tour is extended as a vacation, the value of such fringe
benefit shall be limited to the expenses incurred in relation to such extended period of stay or
vacation. The amount so determined shall be reduced by the amount, if any, paid or recovered
from the employee for such benefit or amenity.
(iii) Free or concessional food and non-alcoholic beverages [Sub-rule 7(iii) of Rule 3]
(a) The value of free food and non-alcoholic beverages provided by the employer to an
employee shall be the amount of expenditure incurred by such employer. The amount so
determined shall be reduced by the amount, if any, paid or recovered from the employee for
such benefit or amenity:
(b) However, the following would not be treated as a perquisite -
(1) free food and non-alcoholic beverages provided by such employer during working hours
at office or business premises or through paid vouchers which are not transferable and usable
only at eating joints, to the extent the value thereof either case does not exceed fifty rupees
per meal or
(2) Tea or snacks provided during working hours or
(3) Free food and non-alcoholic beverages during working hours provided in a remote area or
an off-shore installation.
(iv) Value of gift, voucher or token in lieu of such gift [Sub-rule 7(iv) of Rule 3]
(a) The value of any gift, or voucher, or token in lieu of which such gift may be received by
the employee or by member of his household on ceremonial occasions or otherwise from the
employer shall be determined as the sum equal to the amount of such gift:
(b) However, if the value of such gift, voucher or token, as the case may be, is below Rs
5,000 in the aggregate during the previous year, the value of perquisite shall be taken as ‘Nil’.
(v) Credit card expenses [Sub-rule 7(v) of Rule 3]
(a) The amount of expenses including membership fees and annual fees incurred by the
employee or any member of his household, which is charged to a credit card (including any
add-on-card) provided by the employer, or otherwise, paid for or reimbursed by such
employer shall be taken to be the value of perquisite chargeable to tax as reduced by the
amount, if any paid or recovered from the employee for such benefit or amenity.

17
(b) However, such expenses incurred wholly and exclusively for official purposes would not
be treated as a perquisite if the following conditions are fulfilled.
Complete details in respect of such expenditure are maintained by the employer which may,
inter alia, include the date of expenditure and the nature of expenditure; the employer gives a
certificate for such expenditure to the effect that the same was incurred wholly and
exclusively for the performance of official duties
(vi) Club expenditure [Sub-rule 7(vi) of Rule 3]
(a) The value of benefit to the employee resulting from the payment or reimbursement by the
employer of any expenditure incurred (including the amount of annual or periodical fee) in a
club by him or by a member of his household shall be determined to be the actual amount of
expenditure incurred or reimbursed by such employer on that account. The amount so
determined shall be reduced by the amount, if any, paid or recovered from the employee for
such benefit or amenity.
However, where the employer has obtained corporate membership of the club and the facility
is enjoyed by the employee or any member of his household, the value of perquisite shall not
include the initial fee paid for acquiring such corporate membership.
(b) Further, if such expenditure is incurred wholly and exclusively for business purposes, it
would not be treated as a perquisite provided the following conditions are fulfilled:-
(1) Complete details in respect of such expenditure are maintained by the employer which
may, inter alia, include the date of expenditure, the nature of expenditure and its business
expediency;
(2) The employer gives a certificate for such expenditure to the effect that the same was
incurred wholly and exclusively for the performance of official duties.
(c) There would be no perquisite for use of health club, sports and similar facilities provided
uniformly to all employees by the employer.
vii) Use of moveable assets [Sub-rule 7(vii) of Rule 3] - Value of perquisite is determined
as under:
Asset given Value of benefit
a) Use of laptops and computers NIL
(b) Movable assets, other than -
(i) laptops and computers; and 10% p.a. of the actual cost of such asset,
(ii) assets already specified or the amount of rent or charge paid, or
payable by the employer,
Note: Where the employee is paying any as the case may be
amount in respect of such asset, the
amount so paid shall be deducted from
the value of perquisite determined above.

(ix) Other benefit or amenity [Sub-rule 7(ix) of Rule 3] - The value of any other benefit or
amenity, service, right or privilege provided by the employer shall be determined on the basis

18
of cost to the employer under an arms' length transaction as reduced by the employee's
contribution, if any. However, there will be no taxable perquisite in respect of expenses on
telephones including mobile phone actually incurred on behalf of the employee by the
employer i.e., if an employer pays or reimburses telephone bills or mobile phone charges of
employee, there will be no taxable perquisite.
(8) Valuation of specified security or sweat equity share for the purpose of section 17(2)
(vi) [Sub-rule (8)] - The fair market value of any specified security or sweat equity share,
being an equity share in a company, on the date on which the option is exercised by the
employee, shall be determined in the following manner -
(1) In a case where, on the date of the exercising of the option, the share in the company is
listed on a recognized stock exchange, the fair market value shall be the average of the
opening price and closing price of the share on that date on the said stock exchange.
However, where, on the date of exercising of the option, the share is listed on more than one
recognized stock exchanges, the fair market value shall be the average of opening price and
closing price of the share on the recognised stock exchange which records the highest volume
of trading in the share.
Further, where on the date of exercising of the option, there is no trading in the share on any
recognized stock exchange, the fair market value shall be—
(a) the closing price of the share on any recognised stock exchange on a date closest to the
date of exercising of the option and immediately preceding such date; or
(b) the closing price of the share on a recognised stock exchange, which records the highest
volume of trading in such share, if the closing price, as on the date closest to the date of
exercising of the option and immediately preceding such date, is recorded on more than one
recognized stock exchange.
“Closing price” of a share on a recognised stock exchange on a date shall be the price of the
last settlement on such date on such stock exchange. However, where the stock exchange
quotes both “buy” and “sell” prices, the closing price shall be the “sell” price of the last
settlement.
“Opening price” of a share on a recognised stock exchange on a date shall be the price of the
first settlement on such date on such stock exchange. However, where the stock exchange
quotes both “buy” and “sell” prices, the opening price shall be the “sell” price of the first
settlement.
(9) Valuation of specified security not being an equity share in a company for the
purpose of section 17(2)(vi) [Sub-rule (9)] –
The fair market value of any specified security, not being an equity share in a company, on
the date on which the option is exercised by the employee, shall be such value as determined
by a merchant banker on the specified date.
For this purpose, “specified date” means,—
(i) the date of exercising of the option; or

19
(ii) Any date earlier than the date of the exercising of the option, not being a date which is
more than 180 days earlier than the date of the exercising.
Definitions for the purpose of perquisite rules - The following definitions are relevant for
applying the perquisite valuation rules -
(i) “Member of household” shall include- (a) spouse(s), (b) children and their spouses,
(c) Parents, and (d) servants and dependents;
(ii) “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 payment of tax;
(d) The value of perquisites specified in clause (2) of section 17 of the Income-tax Act;
(e) Any payment or expenditure specifically excluded under proviso to sub-clause (iii) of
clause (2) or proviso to clause (2) of section 17;
(f) lump-sum payments received at the time of termination of service or superannuation or
voluntary retirement, like gratuity, severance pay, leave encashment, voluntary retrenchment
benefits, commutation of pension and similar payments;
(10) Medical facilities - The following medical facilities will not amount to a perquisite:
(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 in any hospital
maintained by the Government/local authority/any other hospital approved by the
Government for the purpose of medical treatment of its employees;
(iii) 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 in respect of the
prescribed disease or ailments in any hospital approved by the Chief Commissioner having
regard to the prescribed guidelines. However, in order to claim this benefit, the employee
shall attach 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.
Thus, the two types of facilities are covered:
(a) Payment by the employer for treatment in a Government hospital and
(b) Payment by an employer for treatment of prescribed diseases in any hospital approved by
the Chief Commissioner.

20
(iv) Any premium paid by an employer in relation to an employee to effect an insurance on
the health of such employee. However, any such scheme should be approved by the Central
Government or the Insurance Regulatory Development Authority (IRDA) for the purposes of
section 36(1)(ib).
(v) Any sum paid by the employer in respect of any premium paid by the employee to effect
an insurance on his family under any scheme approved by the Central Government for the
purposes of section 80D.
(vi) 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 to the extent of
` 15,000 in the previous year.
Note: It is important to note that this expenditure need not be incurred either in the
government hospital or in a hospital approved by the Chief Commissioner of income tax.
(vii) Any expenditure incurred by the employer on the following:
(a) medical treatment of the employee or any member of the family of such employee outside
India;
(b) Travel and stay abroad of the employee or any member of the family of such employee
for medical treatment;
(c) Travel and stay abroad of one attendant who accompanies the patient in connection with
such treatment.
Conditions:
1. The perquisite element in respect of expenditure on medical treatment and stay abroad will
be exempt only to the extent permitted by the RBI.
2. The expenses in respect of traveling of the patient and the attendant will be exempt if the
employee’s gross total income as computed before including the said expenditure does not
exceed Rs 2 lakh.
Note: For this purpose, family means spouse and children of the individual. Children may be
dependent or independent, married or unmarried. It also includes parents, brothers and sisters
of the individual if they are wholly or mainly dependent upon him.
(11) Payment of premium on personal accident insurance policies - If an employer takes
personal accident insurance policies on the lives of employees and pays the insurance
premium, no immediate benefit would become payable and benefit will accrue at a future
date only if certain events take place.
Moreover, the employers would be taking such policy in their business interest only, so as to
indemnify themselves from payment of any compensation. Therefore, the premium so paid
will not constitute a taxable perquisite in the employees’ hands.

Provident fund

21
Provident fund scheme is a scheme intended to give substantial benefits to an employee at the
time of his retirement. Under this scheme, a specified sum is deducted from the salary of the
employee as his contribution towards the fund. The employer also generally contributes the
same amount out of his pocket, to the fund. The contribution of the employer and the
employee are invested in approved securities. Interest earned thereon is also credited to the
account of the employee. Thus, the credit balance in a provident fund account of an employee
consists of the following:
(i) Employee’s contribution
(ii) Interest on employee’s contribution
(iii) Employer’s contribution
(iv) Interest on employer’s contribution.
The accumulated balance is paid to the employee at the time of his retirement or resignation.
In the case of death of the employee, the same is paid to his legal heirs.
The provident fund represents an important source of small savings available to the
Government. Hence, the Income-tax Act, 1961 gives certain deductions on savings in a
provident fund account.
(i) Recognised Provident Fund (RPF)
Recognised provident fund means a provident fund recognised by the Commissioner of
Income-tax for the purposes of income-tax. It is governed by Part A of Schedule IV to the
Income-tax Act, 1961. This schedule contains various rules regarding the following:
(a) Recognition of the fund
(b) Employee’s and employer’s contribution to the fund
(c) Treatment of accumulated balance etc.
A fund constituted under the Employees’ Provident Fund and Miscellaneous
Provisions Act, 1952 will also be a Recognised Provident Fund.
(ii) Unrecognised Provident Fund (URPF)
A fund not recognised by the Commissioner of Income-tax is Unrecognised Provident Fund.
(iii) Statutory Provident Fund (SPF)
The SPF is governed by Provident Funds Act, 1925. It applies to employees of government,
railways, semi-government institutions, local bodies, universities and all recognised
educational institutions.
(iv) Public Provident Fund (PPF)
Public provident fund is operated under the Public Provident Fund Act, 1968. A membership
of the fund is open to every individual though it is ideally suited to self-employed people. A
salaried employee may also contribute to PPF in addition to the fund operated by his
employer. An individual may contribute to the fund on his own behalf as also on behalf of a

22
minor of whom he is the guardian. For getting a deduction under section 80C, a member is
required to contribute to the PPF a minimum of Rs. 500 in a year. The maximum amount that
may qualify for deduction on this account is Rs. 1, 50,000 as per PPF rules. A member of
PPF may deposit his contribution in as many installments in multiples of Rs. 500 as is
convenient to him. The sums contributed to PPF earn interest at 8.0%. The amount of
contribution may be paid at any of the offices or branch offices of the State Bank of India or
its subsidiaries and specified branches of banks or any Post Office.
Particulars RPF URPF SPF PPF
Employer’s Amount in Not taxable Fully exempt N.A. (as
Contribution excess of 12% yearly there is only
of salary is assesses own
taxable contribution)
Employee’s Eligible for Not eligible for Eligible for Eligible for
Contribution deduction u/s deduction deduction deduction
80C u/s 80C u/s 80C
Interest Amount in Not taxable Fully exempt Fully exempt
Credited excess of 9.5% yearly
p.a. is taxable
Maturity amount Fully exempt taxable Fully exempt Fully exempt

DEDUCTIONS FROM SALARY -

The income chargeable under the head ‘Salaries’ is computed after making the following
deductions:
(1) Standard deduction
(2) Entertainment allowance [Section 16(ii)]
(3) Professional tax [Section 16(iii)]
(1) Standard deduction –Rs. 50000
(2) Entertainment allowance - Entertainment allowance received is fully taxable and is first
to be included in the salary and thereafter the following deduction is to be made:
However, deduction in respect of entertainment allowance is available in case of Government
employees. The amount of deduction will be lower of:
(i) One-fifth of his basic salary or
(ii) Rs 5,000 or
(iii) Entertainment allowance received.
Amount actually spent by the employee towards entertainment out of the entertainment
allowance received by him is not a relevant consideration at all.
(3) Professional tax on employment - Professional tax or taxes on employment levied by a
State under Article 276 of the Constitution is allowed as deduction only when it is actually
paid by the employee during the previous year.

23
If professional tax is reimbursed or directly paid by the employer on behalf of the employee,
the amount so paid is first included as salary income and then allowed as a deduction u/s 16.
Deduction under Section 80C
Under the provisions of section 80C, an assessee will be entitled to a deduction from
gross total income of the amount invested in
1. Life Insurance premium paid on a policy taken on his own life, life of the spouse or
any child (child may be dependent/ independent). In the case of a Hindu undivided
family, policy may be taken on the life of any member of the family. The premium paid
should be maximum of 20% of sum assured.
2. Any sum deducted from salary payable to a Government employee for the purpose
of securing him a deferred annuity (subject to a maximum of 20% of salary)
3. Contribution towards statutory provident fund and recognized providend fund.
4. Contribution towards 15 year public provident fund (maximum of Rs70,000).
5. Contribution towards an approved superannuation fund
6. Subscription to National Savings Certificates, VIII Issue.
7. Contribution for participating in the Unit-Linked Insurance Plan (ULIP) of Unit Trust of
India.
8. Contribution for participating in the unit-linked insurance plan (ULIP) of LIC
Mutual Fund (i.e. Dhanraksha plan of LIC Mutual Fund)
9. Payment for notified annuity plan of LIC (i.e. Jeevan Dhara, Jeevan Akshay New Jeevan
Dhara, etc.) or any other insurer.
10. Subscription towards notified units of Mutual Fund or UTI
11. Contribution to notified pension fund set up by Mutual Fund or UTI.
12. Any sum paid (including accrued interest) as subscription to Home Loan Account
Scheme of the National Housing Bank
13. Any sum paid as tuition fees to any university/college/educational institution in
India for fulltime education.

Amount of deduction; we add the amounts invested / spent in above mentioned schemes and
this amount is known as Gross qualifying amount. The amount deductible is a) Gross
qualifying amount; or b) Rs 1, 50,000. Whichever is less.
Note:-The maximum deduction under sections 80C, 80CCC and 80CCDis Rs 1, 50,000
PROFORMA FOR COMPUTATION OF INCOME UNDER THE HEAD
“SALARIES”
Sl. Particulars Rs Rs.
1 Basic Salary XXXX
2 Fees/Commission XXXX
3 Bonus XXXX
4 Allowances:
(a) Dearness Allowance XXXX
(b) House Rent Allowance XXXX

24
 Less: Least of the following is exempt
HRA actually received XXXX
Rent paid (-)10% of salary for the relevant period XXXX
50%/40% of salary for the relevant period XXXX XXXX
(c) Children Education Allowance XXXX
Less: 100 per month per child upto maximum of two children XXXX XXXX
(d) Children Hostel Allowance XXXX
Less: 300 per month per child upto maximum of two children XXXX XXXX
(e) Transport allowance xxx XXXX
Less: 1,600 per month (3,200 in case of blind or deaf and dumb or
Orthopedically handicapped employee) XXXX XXXX
(f) Entertainment Allowance XXXX
(g) Other Allowances XXXX
5 Taxable Perquisites
(a) Valuation of rent free accommodation
If accommodation owned by the employer
(i) Cities having population > 25 lakh
15% of salary (–) rent recovered from employee XXXX XXXX
(ii) Cities having population > 10 lakh < 25 lakh
10% of salary (–) rent recovered from employee XXXX XXXX
(iii) In other cities
7.5% of salary (-) rent recovered from employee
If accommodation taken on lease by the employer
Lower of the following
Rent paid by the employer or15% of salary XXXX
Less: rent recovered from the employee XXXX XXXX
(b) Valuation of use of motor car XXXX
(c) Any other perquisite XXXX
6 Taxable annuity or un commuted pension XXXX
7 Taxable Commuted pension XXXX
8 Taxable Gratuity XXXX
9 Leave encashment XXXX
10 Leave travel concession/Voluntary retirement XXXX
compensation/Retrenchment compensation etc.
11 Professional tax, if paid by the employer XXXX
Gross Salary XXXX
Deduction u/s 16
Less: Standard deduction 50,000
Less: Entertainment allowance (only for Govt. employees) XXXX
Less: Professional Tax XXXX XXXX
Income from Salary XXXX

25