.

Dr. K R Gola
[email protected]
School of Business studies
Sharda University

INCOME FROM SALARY

( Section 15, 16 and 17)
B.COM/BBA/ACCA-IV Term

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After going through this lesson you should be
able to
Know the conditions for charging income with
regard to salaries
Identify the different form of salary
Discuss the tax provisions of retirements benefits
(Pension and Gratuity)
Classify and discuss the tax provision of different
types of allowances and Perquisites
Describe the tax treatment of provident funds
Apply the deduction under the head of salary

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 List of Contents (Slide

Number)
Different heads of Income (4)
 Conditions for charging income with regard to salaries (5)
 Different form of salary (6)
 Pension – meaning types and Tax provision (8)
 Gratuity- Meaning, and Tax provision (11)
 Tax provision of encashment of leave (13)
 Allowance – Meaning, types and tax provisions (14)
 Perquisites – Meaning, types and valuation (19)
 Provident funds- Meaning, types and tax provision (25)
 Deduction under income from salary (28)
 Test your knowledge ( QUIZ) (29)
 Assignment questions (31)
 Further readings (32)
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HEADS OF INCOME

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 Income from Salary
 Payment made by the employer to the employee in
consideration of his services.
Conditions for charging income with regard to salaries
1. Relationship between payer & Payee- amount received
by an individual must be treated salary.
2. More than one sources of salary: Taxable under salaries.
3. Salary and Wages: Taxable under salaries.
4. Salary from former employer- chargeable to tax.
5.Remunerations/voluntary payments-chargeable to tax
6.Salary and Professional income being distinguished: not
taxable under salary, works of some assessee are of
independent nature, provide services to persons.
actors, singers, advocate, C.A, authors

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Different forms of salary sec-17(1 )
 Basic salary- fully taxable
 Dearness allowance (DA)- fully taxable
 Wages- fully taxable
 Bonus- fully taxable
 Annuity or pension- partly
 Gratuity- partly
 Perquisites- partly
 Fees, commission- fully taxable
 Advance salary or Arrears of salary- fully taxable
 Encashment of leaves- Partly taxable
 HRA- partly
 Provident Funds – Partly taxable

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Gross salary
Salary

PERQUISITES
PENSION

GRATUITY ALLOWANCES

Provident
Funds

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Pension or Annuity
Pension is a periodical or lump
sum payment received by an
employee from the employer
after his retirement from
services.

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Pension
Periodical or PENSION
uncommuted (taxable
Lump sum or
for Govt & Non-Govt commuted
employee)

Govt employee Non-govt

employee

Fully exempt 1.Receives 2.Gratuity

gratuity (1/3 not received
of commuted (1/2 of the
value of full commuted
pension is value of full
exempt) pension is
exempt

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 Pension
.
Pension Status of employee taxable

Uncommuted Govt employee and Chargeable to

(Periodical) Non Govt tax
Commuted (Lump Government employee Fully exempt
sum)
Commuted Non-Govt employee Partly exempt

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 Gratuity
A retirement benefit and payable at the
time of end of the employment on the
basis of duration of service.
Status of employee Whether gratuity is taxable

Govt employee Fully exempt

Non-govt employee covered by Partly exempt

gratuity act, 1972
Non-govt employee not Partly exempt
covered by gratuity act, 1972

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 Exemption of Gratuity u/s
10(10)
Gover Non- Government employees
nment
emplo
yee
Employees covered under Any other employees
gratuity act
Fully Minimum of the following 3 limits Minimum of the following 3
exempt is exempt from tax limits is exempt from tax
(a)Actual gratuity or (a)Actual gratuity or
(b) 15 days salary= salary drawn (b) half month of average
x15/26 (15 Days salary x length salary of each completed
of services) or year of services the month=
(c) Rs. 20,00,000 average salary of ten months
Length of services = if the period or
of services is 6 months or less (c) Rs. 20,00,000
than 6 months, it shall be ignored Length of services = any
and if it is more than 6 months , fraction of the year shall be
it shall be taken as one full year. ignored
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Salary means- Basic + DA Salary means- Basic + DA +
ALLOWANCE
.
All monetary payment made by an employer to
his employee, other than salary are termed as
allowance. it is fixed ,pre determined and given
regularly in addition to the salary
Types of allowance
(a)Fully Taxable
(b) Fully Exempted
(c) Partly taxable

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FULLY TAXABLE ALLOWANCE
Dearness allowance
Medical allowance
City compensatory allowance (paid to
employees serving in big cities)
Over-time allowance
warden ship allowance
Lunch or Tiffin allowance
Servant allowance

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PARTLY TAXABLE ALLOWANCE

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PARTLY TAXABLE ALLOWANCE

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FULLY EXEMPTED ALLOWANCES
Foreign allowance
Allowance to high court Judge
Daily allowance
Helper allowance
Research/Academic allowance

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PERQUISITES (PERKS)

Any casual receipt or gain available to a

salaried employee, in additional to regular
salary or wages.
 Thevalue of any concession in the matter of rent for
accommodation provided to the assessee by the
employer
For instance: rent free accommodation, free
electricity, water, gas, servants, education and car.

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TYPES OF PERQUISITES

 General perquisite (taxable)

 Tax free perquisite

General perquisite (taxable in the hands of every

employee assessee)
◦ Rent free accommodation
◦ Employee life insurance premium payable by
employer
◦ Transport
◦ Credit card facility
◦ Domestic servants, sweeper and watchman
◦ Gas, electricity or water supply

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TAX-FREE PERQUISITE (FOR EVERY EMPLOYEE)

Medical facility
Refreshment facility
Car/Conveyance facility (Office)
Telephone
Lunch
Car facility
Computer or laptop

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 Valuation of perquisites
 (a) Valuation of rent free accommodation
 (b) Valuation of motor car
 (c) Valuation of Life Insurance premium= any sum
payable by the employer is taxable in hands of all
employee.
 (e) Valuation of perquisites in respect of free domestic
servants, sweeper and watchman - total amount of
salary paid by employer is taxable perquisite in hands of
employee as reduced by any amount paid by the employee
for such services
 (f) Valuation of perquisites in respect of gas, electricity
or water supply- actual expenditure of the employer as
reduced by any amount paid by the employee
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
Valuation of perquisites
Valuation of perquisite in respect of free education = (i) expenditure
incurred to providing training to employee not taxable (ii) education is
provided to children of employee (upto Rs. 1000 per month per child is
not taxable
 Valuation of medical facilities- (a) Fixed medical allowance is always
taxable
 (b) The perquisites in respect of medical facility provided by an
employer in the following hospital/ clinic is not chargeable to tax
 (i) hospital, owned or maintained by employer(ii) hospital of SG/CG
 (iii) Private hospital if it is recommended by government for treatment
of government employee
 (c) Medical insurance premium paid by the employer is not chargeable
to tax
 (c) Any other facility in India- any other expenditure incurred or
reimbursed by the employer for providing medical facility in India is
chargeable to tax.
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Valuation of Rent Free
Accommodation(unfurnished)

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Valuation of Rent Free
Accommodation(Unfurnished)

Population exceeding 40 Lakh- 10% of salary

Population exceeding 15 to 40 Lakh-7.5% of salary
Any other- 5% of salary

Valuation of Rent Free Accommodation (furnished)

Valuation of furnished
Accommodation= Valuation of
unfurnished + 10% cost of furnished
(Salary includes: Basic + DA+ Commission+ Taxable
Allowance)
LF= 5000x 12= 60,000 + 30,000 = 90,000
1,00,000 + 10,000 = 1,10,000

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Valuation of motor car

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Calculation
 Mr. X who was employed with XYZ Ltd. Got the following salary and benefits in P.Y
 1. Salary Rs. 5, 10,000
 2. Dearness Allowance Rs. 4,00,000
 3. Medical Allowance Rs. 90,000
 4. Children Education Allowance (for two children) Rs. 5,200
 5. Rent free house in Delhi (Population 25 Lakh) for which the employer is owned
of the House. The house is equipped with furniture. The cost of furniture is Rs
20,000 pm.
 6. The employer had provided him a domestic servant; the employer paid Rs 800 per
month.
 7. Mr. X has been provided a car (1800 CC) which is owned by employer and the
expenses incurred by the employer and provided to employee for partially official
and partly private purpose. The driver also provided by the employer and the salary
of driver is Rs. 5000 p.m
 8. Mr. X deposited Rs. 20,000 in PPF (Section 80-C). Compute his taxable Income
and tax liability for the AY 2024-25, Assuming that he has no other income.

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Answer:
 Basic Salary- 5,10,000 + DA- 4,00,000 + MA- 90,000 +CEA- 5200-
2400= 2800
 salary = 10,02800
 Valuation of Unfurnished house- Private employees- Employer is
owned the house- Population is 25L
 = Valuation ( Taxable amount) = 7.5% of salary
 Salary = 10,[email protected]%= 75,210
 Valuation of Furnished= Valuation of unfur nished + 10% cost of
furnished = 75,210 + 24000 = 99,210
 Valuation of perquisite ( Servant)= 800x12 = 9600
 Valuation of car – 2400 x 12 + 900 x12 = 39,600
 Gross Salary = 10,02800+ 99210+9600+39600= 11,51210/- Less
deductions – 50,000 SD+150000 80C + 25,000 80D = 2,25000/-
 Gross Salary = 11,51210- 2,25,000
 Taxable Salary= 9,26,210
 Tax Liability= 0-2.5L –Nil, 2.5 to 5L -5%, 5L to 10 L – 20% more than
10L-30%
 2.5L @ 5% = 12,500, 4,26210@20% = 85,242
 12500 + 85242= Gross Tax Liability = 97742+ 4%=3909
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
Difference between Allowance and Perquisite

Allowances Perquisites (perk)

Allowance are provided only Perquisites can be either
in cash provided in cash or in kind
Received by the employee in It is only the advantage that
his hands and then they are is received.
spent

Allowance are on regular Whereas perquisite is a

basis casual gain or receipts.

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Provident Funds
A retirement benefit scheme. certain
amount is deducted from the salary of
the employee as his contribution. The
employer is also contribute the same
amount out of his pocket to the fund.
Interest earned thereon is also credited
to the PF account of the employee.
(a) Statutory PF
(b) Recognized PF
(c) Unrecognized PF

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Kinds of Provident Funds
SPF- Set-up under the provision of Provident
Fund Act, 1952, this fund is maintained by the
Government
RPF- any organization employing 20 or more
persons is covered by the PF act 1952 and start
the PF scheme for employee after five years of
establishment
UPF- PF is not recognized by the commissioner of
income tax .

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 Tax Treatment on PF
SPF RPF UFP
Employer’s Exempt Exempt up to 12% Exempt from
contribution from tax of salary * (Basic tax
to PF + DA+ FC)
Deduction Available Available Not Available
under 80C
Interest credit Exempt Exempt if rate of Not Available
to PF from tax interest does not
exceed 9.5%
Lump sum Exempt exempt Not Available
payment at from tax
the time of
retirement or
termination of
services

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 Deduction from Salary
Standard deduction
It refers to a straight reduction of salary income up to Rs.50,000 or
75,000.
 Entertainment deduction
Allowable to Govt. employees only to the extent of the least of the
following:
Rs. 5,000 or 20% of Salary exclusive of any allowance, benefit or other
perquisite or Actual entertainment allowance received for the previous
year.

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 Practice Question
 Mr. Y who was employed with ABC Ltd. Got the following salary and
benefits. Calculate taxable income and tax liability as per new tax slab
 1. Basic pay Rs. 8, 60,000, 2. Bonus Rs. 2, 00,000
 3. Entertainment Allowance Rs. 80,000. 4. Lunch allowance Rs. 18,000
 5. Free car (1200 cc) facility for office use only (car owned by the employer
and expenses also incurred by the employer)
 6. A rent free Unfurnished House: The house is taken on lease rent and rent
paid Rs. 2, 50,000.
 7. Premium of life insurance Rs. 6000 Paid by employer.
 8. Interest credited in EPF account @ 11% in PY comes to 93,500.
 Calculate taxable income and tax liability from salary

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 Basic salary : 8,60,000 + Bonus : 2,0,0000 + 80,000 +
18,000 = Rs. 11,58,000
 Valuation of Car : Nil or 0
 Valuation of unfurnished accommodation: Rent paid or
15% of salary ( Whichever is less) Salary – Basic + DA+
Commission+ Taxable allowance ( 11,58,000)
 = 2,50,000 or 173700 = 1,73700
 Valuation of Un. Accommodation = 1,73700
 Valuation of LIC premium = 6,000
 Taxable Interest for EPF = 11% = 93500
 Whole amount of EPF = 100/11 X 93500 = 8,50,000
 As per limit only 9.5% will be exempted, 8,50000x1.5% =
Taxable interest = 12,750
 Gross salary= 11,58,000 + 0 + 1,73700+ 6,000 + 12,750 =
13,50450
 Net Salary = 13,50450 -75,000 = 12,75450
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 Taxable Salary = 12,75450
 3L to 6 L =5%, = 3L @ 5 % = 15,000
 6L to 10 L = 10% = 4L@10% = 40,000
 10L to 12 L = 15%= 2 L @ 15%= 30,000
 12 to 15L = 20% =75450@20%= 15090

 Gross Tax Liability = 1,00,090 +4% =

Net Tax Liability Rs. 1,04093

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 Test your knowledge ( Quiz)
Q.1: What is the current standard deduction in the salary income ? ( as per new tax slab)
(a) 40,000 (b) 50,000(c) 60,000 (d) 75,000
Q.2: The HRA paid to an employee residing in Bhopal is exempt up to the lower of actual
HRA, excess of rent paid over 10% of salary and
(a) 30% of salary (b) 40 % (c) 50% (d) 60%
Q.3: Allowances received by a government employee posted abroad are
(a) fully exempted (b) fully taxable (c) partly exempted (d) not taxable in India
Q.4: What is the taxable perquisite amount in salary for rent-free
accommodation rented by the employer and provided to the employee?
 Actual rent paid or 05% of salary (less) (b) Actual rent paid or 10% of salary (less)
(c) Actual rent paid or 15% of salary (less) (d) Actual rent paid or 20% of salary (less)
Q.5: Children education allowance is exempted up to
 Rs. 200 p.m. per child (b) 100 p.m. per child (c) 300 p.m. per child (d) 400 p.m. per child
Q.6: What is the taxable amount of perquisite in the hands of the employee
when a car is provided for office purposes, and all expenses are borne
by the employer?.
 2400 pm (b) 1800 pm (c) 900 pm (d) Nil
Q.7: The new tax regime eliminates all deductions and exemptions except
for the standard deduction of ₹75,000. (True or False)
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Assignment Question

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