Tax Treatment – Salary Income, allowances & perquisites

1. Chargeability — S. 15 and S. 17

Salary is chargeable to tax on “due” or “receipt” basis whichever is earlier and includes wages, annuity or pension, gratuity, fees, commission, perquisites or profits in lieu of salary, advance salary, leave encashment, etc.

2. Deductions from Salary — S. 16

a. Standard Deduction (S. 16(i))

Standard deduction is Rs 50,000 allowed from A.Y. 2020-21 onwards

b. Entertainment Allowance (S. 16(ii))

For government employees, the least of —

1. Rs. 5,000; or

2. 20% of salary; or

3. actual amount of entertainment allowance.

c. Tax on employment on paid basis (S. 16(iii)).

3. Profits in lieu of Salary (S. 17(3))

It includes —

1. any compensation from employer or former employer on termination or modification of the terms of employment.

2. any receipt from employer/former employer or from provident/other fund (other than gratuity, commuted pension, retrenchment compensation, house rent allowance, provident fund or such other funds) to extent not consisting of contributions by assessee/interest on such contributions.

3. any sum received under a keyman insurance policy including the sum allocated by way of bonus on such policy.

4. any sum received before his joining any employment or after cessation of his employment.

4. Allowances and exemptions

a. Pension (S. 10(10A))

• Pension is taxable as salary (S. 17(1)(ii)).
• Commuted value of pension is exempt u/s. 10(10A).

i. for Government employees, fully exempt

ii. for other employees, following is exempt —

a. if employee has received gratuity then commuted value of 1/3rd of the pension which he is entitled to receive and

b. in any other case, commuted value of 1/2 of the pension which he is entitled to receive.

iii. any payment in commutation of pension received from fund set up by LIC is exempt u/s. 10(23AAB).

b. Leave Travel Concession or Assistance [S. 10(5) — Rule 2B]

• available to Indian as well as foreign citizen for himself/spouse/children/dependent parents, brothers and sisters.
• limited to amount actually spent on travelling of employee and his family members.
• during employment or on retirement or on termination.
• for travelling to any place in India.
• allowed twice in a block of four calendar years.
• block commenced from calendar year 1986. (Current block — 2018-21).
• exemption on travel concession will not be admissible to more than two surviving children of an individual born after 1-10-1998.
• allowance in cases of destination connected by air/rail is restricted to economy class air fare of national carrier/A.C. first class fare by shortest route. For places not connected by rail, please refer Rule 2B.
• For carry over of the concession, please refer Rule 2B.

c. Gratuity [S. 10(10)]

Death-cum-retirement gratuity received by the Government employees or employees under Civil Services — wholly exempt from tax.

i. Employees covered by Payment of Gratuity Act.

Amount received on termination, after continuous service of not less than five years qualifies for exemption

Exemption is least of the following : (aggregate maximum from any number of employers)

1. 15 days salary (denominator taken as 26 in case of monthly salary) for every completed year/part thereof in excess of 6 months, or

2. Rs. 20,00,000

3. gratuity actually received whichever is less.

ii. Other employees — Amount received on retirement, incapacitation, death or termination — Exemption is least of the following : (aggregate maximum from any number of employments)

1. Rs. 3,50,000/- (Rs. 10 Lakh w.e.f 24th May 2010)

2. half month’s salary for each completed year of service; (based on last ten months’ average salary), or

3. gratuity actually received.

• For meaning of “salary”. Refer para 6 below.

d. Retrenchment Compensation [S. 10(10B)]

i. Exempt to the extent of the lower of the following:

1. amount calculated in accordance with S. 25F(b) of the Industrial Disputes Act, 1947; or

2. Rs. 50,000/-

ii. In cases where the scheme is approved by the Central Government the entire amount is exempt.

e. Voluntary Retirement Compensation [S. 10 (10C)]

Any amount received or receivable by an employee of

i. a public sector company, or

ii. any other company, or

iii. an authority established under a Central, State or Provincial Act, or

iv. a local authority

v. a co-operative society

vi. a university established under a Central, State or Provincial Act

vii. an Indian Institute of Technology

viii. any State Government; or

ix. the Central Government; or

x. notified institutions having importance throughout India or in any state or states.

xi. notified Institute of Management

at the time of his voluntary retirement or termination under a scheme framed in accordance with guidelines prescribed by Rule 2BA. Exemption allowable only in One A.Y. Restricted to Rs. 5 lakhs.

* The exemption is not available on the amount on which any relief has been allowed to the assessee u/s. 89 for any Asst. Year in respect of any amount received or receivable on voluntary retirement or termination etc.

f. Tax on perquisite paid by the employer, at his option is exempt [S. 10 (10CC)].

 g. House Rent Allowance [S. 10(13A) & Rule 2A]

The least of the following is exempt from tax:

i. 50% of salary, (residential house situated at Mumbai, Kolkata, Delhi or Chennai) and 40% of salary where residential house is situated at any other place;

ii. actual house rent allowance received by the employee;

iii. excess of rent paid over 10% of salary.

h. Leave Encashment [S. 10(10AA)]

Encashment of earned leave while in service will be treated as income. S. 17(1)(va).

Encashment of earned leave on retirement would however, be exempt to the extent of least of:

i. 10 months salary calculated on the basis of last 10 months average salary or

ii. Rs. 3,00,000

iii. Amount equivalent to earned leave

iv. Actual amount paid by the employer

Entitlement to earned leave not to exceed 30 days for every year of actual service.

Limits provided for aggregate maximum from any number of employers.

Encashment of earned leave on retirement would be wholly exempt for employees of Central/State Government.

i. Medical benefits (S. 17)

Medical treatment provided to an employee or any member of his family (spouse, children and dependent brothers, sisters and parents) will be exempt in the following cases:

i. treatment in a hospital (including dispensary or clinic or nursing home) maintained by the employer,

ii. treatment in any hospital maintained by the Government, or any local authority or any other hospital approved by Govt.,

iii. treatment in respect of prescribed diseases in a hospital approved by the Chief Commissioner, provided certificate from the hospital specifying the disease and receipt for amount paid is attached along with the return of income,

iv. medical insurance only under a Central Government approved scheme,

v. reimbursement of Insurance premium for mediclaim etc.,

vi. actual expenditure on medical treatment outside India, including expenditure on travel and stay abroad as also on travel and stay abroad of one attendant, to the extent permitted by RBI. Expenditure on travel abroad will be exempt only if the gross annual total income of the employee excluding this perquisite is Rs. 2 lakhs or less.

j. Special Allowances [S. 10(14)]

Following prescribed special allowances are exempt :

i. allowance, not in the nature of perquisite, granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties, to the extent to which actually incurred.

ii. allowance granted to meet personal expense at the place where duties of his office are ordinarily performed or at the place where he ordinarily resides or to compensate for increased cost of living as may be prescribed in Rule 2BB.

k. Nature of allowance prescribed under Rule 2BB

i. For cost of travel on tour or on transfer,

ii. For ordinary daily charges on account of absence from normal place of duty on tour or for journey in connection with transfer,

iii. For conveyance in performance of duties, where free conveyance is not provided,

iv. For expenditure on helper engaged for performance of office duties,

v. For encouraging academic, research and training pursuits in educational and research institutions,

vi. For purchase or maintenance of uniform,

vii. Special Compensatory Allowance in specified areas to extent specified,

viii. Tribal Area Allowances in specified states up to Rs. 200 p.m.

ix. For meeting personal expenditure of employee of transport system running transport vehicle, up to 70% of allowance, maximum of Rs. 10,000 p.m., provided no daily allowance for the said duty is received.

x. Children educational allowance @ Rs. 100 p.m. per child, maximum of two children,

xi. Children hostel allowance @ Rs. 300 p.m. per child, maximum of two children,

xii. Compensatory Field Area Allowance in specified areas, @ Rs. 2,600 p.m.

xiii. Compensatory modified field area allowance @ Rs. 1,000 p.m.

xiv. Counter insurgency allowance @ Rs. 3,900 p.m. to members of armed forces.

xv. Transport allowance granted to an employee, who is blind [or deaf and dumb] or orthopaedically handicapped with disability of lower extremities, to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty exempt upto Rs 3,200 per month

xvi. Underground allowance granted to employee of underground coal mines : Rs. 800 per month.

xvii. Special allowance in the nature of high altitude to members of armed forces :
Rs. 1,060 per month for altitude of 9,000 to 15,000 ft. or Rs. 1,600 per month for altitude above 15,000 ft.

xviii. Special compensatory highly active field area allowance to members of armed forces –
Rs. 4,200 per month.

xix. Island (duty) allowance to members of armed forces – Rs. 3,250/- per month.

5. Perquisites

A. Perquisites taxable in hands of all employees:

i. value of rent-free accommodation.

ii. value of concession in rent.

iii. amount paid by employer in respect of any obligation which otherwise would have been payable by employee.

iv. value of any security or sweat equity shares allotted or transferred by employer/former employer as free or concessional cost.

v. an amount of contribution to an approved superannuation fund by the employer, to an extent it excess Rs. 1,00,000/-.

vi. any sum payable either directly or through a fund by employer (other than recognised PF, approved superannuation fund etc.) to effect an assurance on the life of the employee or to effect a contract for an annuity.

B. Determination of the value of prescribed fringe benefit or amenity

i. Interest free or concessional loan

Value of perquisite w.e.f. 1-4-2000, of the loan given to the employee or any member of his household shall be at the rates charged by State Bank of India in respect of the loans for the same purpose advanced by the employer, on the maximum outstanding monthly balance as reduced by interest actually paid by employee – However, perquisite value for loans (net of amount reimbursed under medical insurance scheme) given for medical treatment of specified disease or petty loans up to Rs. 20,000 is not taxable.

ii. Use of movable assets

Value of benefit shall be 10% p.a. of the actual cost of asset or the rent charges paid by the employer as reduced by amount paid by the employee.

iii. Transfer of movable assets

Value of benefit on transfer of movable asset shall be the actual cost of the asset to the employer as reduced by the amount calculated at 10% of such cost for each completed year of use by the employer and further reduced by the payments made by the employee. The normal wear and tear would be computed at 50% in case of computers and electronic items, and 20% in case of motor cars on the reducing balance method.

C. Perquisites taxable only in hands of specified employees

Other perquisites are taxable only in the hands of the following specified employees; i.e.,

i. Director-employee

ii. Employee having substantial interest in employer-company

iii. Employee drawing salary in excess of Rs. 50,000

D. Perquisites not taxable in all cases

The following perquisites are not taxable under CBDT instructions or by virtue of the Act/Rules:

i. The provision of medical facilities as per para 4(i).

ii. Free meals provided to all employees in office up to Rs. 50 per employee provided by the employer through paid vouchers usable at eating joints.

iii. Telephone including mobile phone provided to the employee.

iv. Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India.

v. Sum payable by an employer to pension or deferred annuity scheme.

vi. Employer’s contribution to staff group insurance scheme.

vii. Actual travelling expenses paid/reimbursed for journeys undertaken for business purposes.

viii. Payment of annual premium on personal accident policy, if such policy is taken to safeguard the employer’s interest. See CIT vs. Lala Shri Dhar (1922) 84 ITR 192 (Delhi).

ix. Rent-free official residence to a High Court or Supreme Court Judge.

x. Rent-free furnished residence to official of Parliament.

xi. Conveyance facility to High Court/Supreme Court Judges.

E. Valuation of perquisites

i. Residential accommodation provided by the employer:

A] Value of Furnished rent free accommodation

Value of Unfurnished accommodation

Plus: 10% per annum of cost of furniture, if the furniture is owned by owned by the employer or actual rent of furniture

B] Value of Unfurnished rent free accommodation

i) Central and State Government employees

License fee of House determined will be taxable

ii) Private sector employees or other employees

a) If it is owned by employer

• • • City having population upto 10 lakhs as per 2001 census – 5% of Salary
    • City having population exceeding 10 lakhs but upto 25 lakhs as per 2001 census – 10% of Salary
    • City having population exceeding 25 lakhs as per 2001 census – 15% of Salary

b) If taken on leased by employer

• • • Actual lease rent paid by employer
    • 15% of Salary

Whichever is less will be taxable

C) Taxability for Hotel Accommodation

a) If Hotel Accommodation is unfurnished

It is not taxable

b) If Hotel Accommodation is furnished

• • • Actual charges paid or payable for such hotel
    • 24% of the salary

Whichever is less will be taxable

Note: If the hotel accommodation is provided for not more than 15 days on transfer of employee from one place to another then it will not be taxable.

ii. Gas, electricity or water supply provided

1. Where employer has supplied gas, electricity or water for household purposes from his own sources without purchasing from any outside agency, the value of such benefits is manufacturing cost incurred per unit by the employer.

2. Where the employer has supplied gas, electricity or water for household purpose, by purchasing from outside agency, value is: amount actually paid by employer.

3. Where any amount is paid by employee the amount so paid shall be deducted from value so arrived.

iii. Free Domestic Servants

Actual cost to employer in respect of free services of a sweeper, a gardener, a watchman or a personal attendant as reduced by the amount paid by an employee.

iv. Free or concessional educational facility

Where educational institution is maintained and owned by the employer or education is allowed in other educational institution due to his employment, the value shall be the cost of such education in a similar institution in or near the locality to the extent such cost does not exceeds Rs. 1,000 per month per child where facility is provided to children of employee as reduced by the amount paid by the employee and in other cases the value shall be the expenditure incurred by the employer.

6. “Salary” for the purposes of computing exemptions of Gratuity, House Rent Allowance and Leave Encashment

Salary includes : a) Basic; b) Dearness Allowance (if the terms of employment provide); c) and Commission at a certain percentage of sales achieved by the employee, if paid in the course of employment. [Refer Gestetner Duplicators Pvt. Ltd. vs. CIT 117 ITR 1 (SC)].

7. Value of following perquisites provided to an employee or to any member of his family, by an employer is taxable in the hands of the employee. (For valuation of such perquisites – See Rule 3)

i. Use of Motor car

ii. Where employer is engaged in the carriage of passengers or goods and provides any facility for private journey free of cost or at concessional fare.

iii. Any travelling, touring, accommodation and any other expenses paid by employer for any holiday availed by the employee or his family members.

iv. Free food and non-alcoholic beverages provided by employer.

v. Any gift/voucher/token in lieu of which gift may be received by the employee or his family member, provided by employer.

vi. Credit card provided by employer.

vii. Club membership provided by employer.

viii. Any other benefit, amenity, service, right or privilege provided by the employer.

Republished with Amendments