1.  Introduction: The statute enjoins every employer to estimate the liability of tax deductible at source and to deduct tax at an average rate. For this the employer is required to determine the salary payable to the employee and accordingly compute the tax liability. The employer must estimate this tax liability at the very beginning of the financial year in accordance with the following sequence of steps:

(1)    The employer should first compute the gross salary payable to the employee during the year taking into account any salary received/receivable by the employee from any other employer/former employer.

(2)      The gross salary is to be reduced by those payments which are exempt from taxation.

(3)      Deductions u/s 16 are to be reduced from the above amount to arrive at the net salary payable.

(4)      Income chargeable under any other head as reported by the employee is to be added and accordingly the gross total income(GTI) is to be computed.

(5)      Deduction under Chapter VI-A for which the employee is eligible is to be reduced from gross total income and thus the total income is to be computed.

(6)      On the basis of the rates in force, the tax liability on the total income of the employee is to be computed.

(7) The tax liability so computed is to be increased by the surcharge payable (if any) and education cess payable at prescribed rate, to arrive at the total tax payable.

(8) 1/12th of this total tax payable is to be deducted every month by the employer.

2.1 What is “salary”- Salary is said to be the remuneration received by or accruing to an individual for service rendered as a result of an express or implied contract. The statute, gives an inclusive but not exhaustive definition of salary. As per sec. 17(1), salary includes therein (i) Wages (ii) Annuity or pension (iii) Gratuity (iv) fees, commission, perquisites or profits in lieu of salary (v) Advance salary (vi) Receipt from provident fund (vii) Contribution of employer to a recongnised provident fund in excess of prescribed limit (viii) Leave encashment

(ix)  compensation as a result of variation of service contract etc.

(x)    Government contribution to a pension scheme.

2.2 Exceptions to salary income: The existence of an ‘employer-employee’ relationship is a must for a payment to be taxed under the head salaries. Accordingly, the following classes of payments do not fall under the purview of the head ‘salary’

(i)        Salary received by a partner from his partnership firm carrying on business – This income is taxable under the head “profits and gains of business and profession”.

(ii)      Salary received by a person as MP or MLA- This income is taxable under the head “income from other sources”. However, the salary received by a person as a Minister of Central Government/State Government is chargeable under the head salaries.

(iii) Family pension that is pension received by the members of the family of an employee subsequent to his death – This is taxable under the head “income from other sources”. However the pension received by an employee from his former employer is taxable under the head salaries.

3 Valuation of Perquisites: The taxable value of perquisites in the hands of the employee is normally taken to be its cost to the employer. However, there are specific rules for valuation of certain perquisites laid down in Rule 3 of the I.T. Rules, which have been revised vide I.T. (thirteenth Amendment) Rules 2009 w.e.f. 1/4/2010 (vide notification 2/2009 dt. 12/1/ 2010- F. No.142/25/2009- SO(TPL)). Rule 3 now provides that the value of perquisite provided by the employer directly to the assessee(employee) or to any member of his household by reason of his employment is to be determined in accordance of the sub rules which are briefly given below.

3.1 Valuation of residential accommodation provided by the employer (Rule 3(1)):-

(a)    Union or State Government Employees – The value of perquisite is the license fee as determined by the Central or the State Government as reduced by the rent actually paid by the employee.

(b)      Non-Govt. Employees‑

(a) Where the accommodation is owned by the employer the perquisite is

(i)          15% of salary in cities having population exceeding 25 lakhs as per 2001 census ;

(ii)         10% of salary in cities having population exceeding 10 lakhs but not exceeding 25 lakhs as per 2001 census ;

(iii) 7.5% of salary in other areas.


(b) Where the accommodation is taken on lease by the employer the perquisite is the actual amount of lease rental paid or payable by the employer or 15% of salary which ever is lower, as reduced by the rent if any actually paid by the employee.

(c)      Value of Furnished Accommodation – The value would be the value of unfurnished accommodation as computed above increased by 10% per annum of the cost of furniture (including T.V./radio/ refrigerator/AC/other gadgets). In case such furniture is hired from a third party, the value of unfurnished accommodation would be increased by the hire charges paid/payable by the employer. However, any payment recovered from the employee towards the above would be reduced from this amount.

(d) Value of hotel accommodation provided by the employer- The value of perquisite arising out of the above would be 24% of salary of the previous year or the actual charges paid or payable to the hotel, whichever is lower. The above would be reduced by any rent actually paid by the employee. It may be noted that no perquisite would arise if the employee is provided such accommodation on transfer from one place to another for a period of 15 days or less.

3.2 Perquisite of motor car provided by the employer Rule 3(2):-

(i)                    Where motor car is owned or hired by the employer and is used wholly and exclusively in the performance of official duties, no perquisite arises provided specified documents are maintained.

(ii)  Where the motor car is owned or hired by the employer but used exclusively for private or personal purposes, the perquisite is the actual amount of expenditure incurred by the employer on running and maintenance including remuneration if any paid to the chauffeur.

This is to be increased by an amount representing normal wear and tear of the motor car as reduced by any amount charged from the employee.

(iii) Where motor car is used partly in performance of duties and partly for private or personal purposes. The perquisite is

(a)      Rs. 1800 (plus Rs. 900 if chauffeur is provided) if running and maintenance is borne by employer.

(b)      Rs. 600 (plus Rs. 900 if chauffeur is provided) where running and maintenance for private use is fully met by employee.

The aforesaid amounts will be increased to Rs. 2400 (instead of Rs. 1800 and Rs. 900/-(instead of Rs. 600) where the motor car provided, has cubic capacity of engine exceeding 1.6 litres.

(iv) Where employee owns a motor car but the actual running and maintenance charges (including remuneration of the chauffeur if any) are met or reimbursed to him by the employer and.

(a)      where the reimbursement is for use of vehicle for official purpose the perquisite will be nil. However specified documents need to be maintained.

(b)      Where vehicle is used partly for official and partly for personal purposes, the perquisite is the actual amount of expenditure incurred by the employer as reduced by amount specified in 3.3.2 (iii) above.

3.3 Provision of sweeper, gardener, watchman or

attendant:- The value of perquisite resulting from provision of a sweeper, a gardener a watchman or a personal attendant shall be the actual cost to the employer as reduced by the amount paid by the employee in respect of such services. (Cost to the employer in respect of the above will be the salary paid/payable) [Rule 3(3)]

3.4 Perquisite arising out of supply of gas, electric energy or water – This shall be determined as the amount paid by the employer to the agency supplying the same. If the supply is from the employer’s own resources, the value of the perquisite would be the manufacturing cost per unit incurred by the employer. [Rule 3(4)].

3.5 Free/Concessional Educational Facility – Value of the perquisite would be the expenditure incurred by the employer. If the educational institution is maintained & owned by the employer, the value would be nil if the value of the benefit per child is below Rs. 1000/- P.M. or else the reasonable cost of such education in a similar institution in or near the locality [Rule 3(5)].

3.6 Free/Concessional journeys provided by an undertaking engaged in carriage or passengers or goods Rule 3(6)- The value of perquisite is the value at which such benefit or such amenity is offered by such employer to the public as reduced by the amount, if any, paid or recovered from the employees for such benefit or amenity. However the aforesaid will not be applicable to employer of an airline or railways.

3.7 Value of certain other benefits :-

(a) Interest free/concessional loans – The value of the perquisite shall be the excess of interest payable at the prescribed interest rate over, interest, if any, actually paid by the employee or any member of his household. The prescribed interest rate would be the rate charged by State Bank of India as on the 1st Day of the relevant Financial Year in respect of loans of the same type and for same purpose advanced by it to general public. Perquisite is to be calculated on the basis of the maximum outstanding monthly balance method. However, loans upto Rs. 20,000/-, loans for medical treatment specified in Rule 3A are exempt, provided the same are not reimbursed under medical insurance.

(b)   Value of free meals and non alcoholic beverages – The value of perquisite is the cost to the employer as reduced by the amount paid or recovered from employee. However aforesaid will not apply to free food or food vouchers to used during working however with value not encoding Rs. 50/- per meal.

(c)    Value of gift or voucher or token – Perquisite is the sum equal to the amount of such gift. However where the value of such gifts and voucher is below Rs. 5000/- in aggregate during the previous year, the perquisite shall be nil.

(d)   Credit Card provided by the employer (Rule 3/7(v)) – The perquisite is the amount of expenses incurred (including membership fee annual fee etc. as reduced by the amount recovered from the employee. However the perquisite shall be nil if the expenses on credit card are incurred wholly and exclusively for official purposes, details of which are maintained and employer certifies it to be for official purposes.

(e)   Club membership provided by the employer – The perquisite is the amount of expenditure incurred or reimbursed by the employer for the membership/annual/or any expenditure, with reference to club membership as reduced by the amount paid by or recovered from the employee. However the aforesaid will not include the following :

(i)           Initial fee paid for acquiring corporate membership.

(ii)   Where such expenses are incurred wholly and exclusively for the purpose of business, its complete details (including business expediency is maintained) and employer certifies it to be for the purpose of business/official duties.

(iii) Where facility of use of health club, sports and similar facilities are uniformly provided to all employees.

(f) Use of Assets

(i)        In case the employee is provided by the employer any immovable asset (other than assets already specified in Rule-3 and other than laptop and computers) then the value of the benefit shall be 10% per annum of the actual cost of such asset. In case asset is hired by the employer and then given to the employee then the value of the benefit shall be the rent or charge paid or payable by the employer. However the amount paid by the employee or recovered from him by the employer (towards the cost of the asset or rent will be reduced from this benefit).

(ii)         Transfer of Immovable Asset If employer transfers to the employee any immovable asset belonging to the employer either directly or indirectly to the employee or member of his household then the value of benefit shall be the actual cost of such asset to the employer. However an amount of 10% of such cost for each completed year of use of asset by the employer shall be reduced as the cost of normal wear and tear. Further the amount paid by or recovered from the employee is a consideration towards such transfer and shall also be reduced. In case of computers and electronics items the normal wear and tear is to be calculated @ 50% while in the case of motor cars @ 20% by the reducing balance method.

(g) Other benefits

3.8 The value of any other benefit or amenity provided by the employer shall be determined on the basis of cost to the employer under an arms’ length transaction as reduced by the employee’s contribution.

3.9 Security or sweat equity share. Employer stock option where any specified security or sweat equity share is provided by the employer to the employee (being an equity share in a company) the value of perquisite, on the date on which the option is exercised by the employee, shall be; the average of the opening and closing price of the share in the listed recognized stock exchange.

Where on the date of exercising of the option the share is listed in more than one stock exchange, then the opening and closing values in the stock exchange recording trading the highest value of that shares trading, will be taken. Further in case no trading in that share takes place on the day of exercise of the option the closing price on the closest date preceding the date of exercise of option shall be taken in case the share is listed in more than one exchange then the value of exchange recording highest transaction shall be taken. In case of a share not listed on a stock exchange the value as determined by a merchant banker on the specified date shall be taken.


4.1 Section 10 of the I.T. Act provides for certain categories of payments to be exempt from taxation, either wholly or partly. Such payments are not to be included under the head ‘salary’ for computing the tax deductible. Some of these are listed below and are discussed in detail in Chapter-5 of this booklet.

i)          Death cum retirement gratuity or any other gratuity: Exempt to the extent specified u/s 10(10).

ii)        Commutation of pension – Exempt to the extent as provided in sec. 10(10A)

iii)      Leave encashment – Exempt to the extent provided in sec. 10(AA).

iv)      Retrenchment Compensation – exempt to the extent provided by section 10(10B).

v)        Compensation on voluntary retirement – Exempt to the extent provided by sec. 10(10C)

vi)      Payment from provident fund – Exempt to the extent provided in sec. 10(11) & sec. 10(12).

vii)    Payment from approved superannuation fund – Exempt under section 10(13).

viii)  Interest income & investments – As provided u/s 10(15).

ix) Exemption of pension/family pension to awardees of PVC, MVC and VC: Clause (18) of section 10 provides for exemption of any income by way of pension received by an individual or family pension received by any member of the family of an individual who has been in the service of the Central Government or State Government and has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or such other gallantry award as may be specifically notified by the Central Government.

4.2 Exemption of Allowances: There are various other receipts besides the above given regularly in addition to salary for meeting specific requirements of the employee. These are referred to as allowances, in common parlance and taxability of some of these are discussed here.

(i)     Leave travel concession:- The value of any travel concession or assistance accrued by or due to an employee from his employer or former employer in connection of his proceeding on leave (a) to any place in India (b) to any place in India on retirement or after termination of service. The amount exempt as prescribed in Rule 2B is the amount actually incurred on performance of travel in India by the shortest route to that place, subject to economy air fare or A.C. Ist class fare. This exemption is available only in respect of two journeys in a block of 4 calendar years.

(ii)      House Rent allowance House rent allowance granted to the employee is exempt u/s 10(13A) to the following extent;

Provided expenditure on rent is actually incurred, the amount of exemption granted is the least of

(1)      HRA received

(2)      Rent paid Less 10% of salary

(3) 40% of salary, (50% in case of Mumbai, Chennai, Kolkata & Delhi). Salary includes bonus + Dearness allowance, where provided by terms of employment.

It has to be noted that only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee subject to the limits laid down in rule 2A, qualifies for exemption from income-tax. Thus, house rent allowance granted to an employee who is residing in a house/flat owned by him is not exempt from income-tax. The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding the house rent allowance or any portion thereof from the total income of the employee. Though incurring actual expenditure on payment of rent is a prerequisite for claiming deduction under section 10(13A), it has been decided as an administrative measure that salaried employees drawing house rent allowance upto Rs. 3,000 per month will be exempted from production of rent receipt. It may, however, be noted that this concession is only for the purpose of tax deduction at source, and, in the regular assessment of the employee, the Assessing Officer will be free to make such inquiry as he deems fit for the purpose of satisfying himself that the employee has incurred actual expenditure on payment of rent.

(iii) Allowances exempt u/s 10(14):- Certain allowances given by the employer to the employee are exempt u/s 10(14). W.e.f. 1-7-1995, all these exempt allowance are detailed in Rule 2BB of Income Tax Rules and are briefly given below:

(i)           Allowance granted to meet cost of travel on tour or transfer.

(ii)         Allowance granted on tour or journey in connection with transfer to meet the daily charges incurred by the employee.

(iii)     Allowance granted to meet conveyance expense incurred in performance of duty, provided no free conveyance is provided.

(iv)     Allowance granted to meet expenses incurred on a helper engaged for performance of official duty.

(v)      Academic, research or training allowance granted in educational or research institutions.

(vi)     Uniform purchase or maintenance allowance.

(vii) Other allowances as prescribed in Rule 2BB(2) for the purpose of Section 10(14)(ii).

4.3 Perquisites exempt from Income Tax : Some instances of perquisites exempt from tax are given below :

I)       Provision of medical facilities (proviso to Sec. 17(2): Value of medical treatment in any hospital maintained by the Government or any local authority or by the employer or approved by the Chief Commissioner of Income Tax. Besides, any sum paid by the employer towards medical reimbursement other than as discussed above is exempt upto Rs. 15,000/-.

II)       Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India (Sec. 10(7)).

III)     Rent free official residence provided to a Judge of High Court or Supreme Court or an Officer of Parliament, Union Minister or Leader of Opposition.

IV)    No perquisite shall arise if interest free/concessional loans are made available for medical treatment of specified diseases in Rule 3A or where the loan is petty not exceeding in the aggregate Rs. 20,000/-.

V) No perquisite shall arise in relation to expenses on telephones including a mobile phone incurred on behalf of the employee by the employer.

5.  Deductions from Salary Income: The deductions are

allowable from the salary income as specified in Section 16 of the IT Act and are being given below:

5.1 Professional/employment tax: As levied by the State Government.

5.2 Entertainment allowance: With effect from A.Y. 2002-03, this deduction is admissible only to government employees to the extent of Rs.5,000 or 20% of salary whichever is less.

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