Taxability of Salary Income, Perquisites & Allowances

Salary is the remuneration received by or accruing to an individual, periodically, for service rendered as a result of an express or implied contract. The actual receipt of salary in the previous year is not material as far as its taxability is concerned. The existence of employer-employee relationship is the sine-qua¬non for taxing a particular receipt under the head ‘salaries. ‘For instance, the salary received by a partner from his partnership firm carrying on a business is not chargeable as “Salaries” but as “Profits & Gains from Business or Profession”. Similarly, salary received by a person as MP or MLA is taxable as “ Income from other sources”, but if a person received salary as Minister of State/ Central Government, the same shall be charged to tax under the head “Salaries”. Pension received by an assessee from his former employer is taxable as “Salaries” whereas pension received on his death by members of his family (Family Pension) is taxed as “Income from other sources”.

1. What Does “Salary” Include

Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of “Salaries” including therein (i) Wages (ii) Annuity or pension (iii) Gratuity (iv) Fees, Commission, perquisites or profits in lieu of salary (v) Advance of Salary (vi) Amount transferred from unrecognized provident fund to recognized provident fund (vii) Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit (viii) Leave Encashment (ix) Compensation as a result of variation in Service contract etc. (x) Contribution made by the Central Government to the account of an employee under a notified pension scheme.

2. Deduction From Salary Income

The following deductions from salary income are admissible as per Section 16 of the Income-tax Act.

(i) Professional/Employment tax levied by the State Govt.

(ii) Entertainment Allowance- Deduction in respect of this is available to a government employee to the extent of Rs. 5000/- or 20% of his salary or actual amount received, whichever is less.

It is to be noted that standard deduction of Rs. 50,000/- is available from salary income w.e.f. 01.04.2019 i.e. AY 2020-21 onwards.

3. Perquisites

“Perquisite” may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages.

“Perquisite” is defined in the section 17(2) of the Income tax Act as including:

(i) Value of rent-free/concessional rent accommodation provided by the employer.

(ii) Any sum paid by employer in respect of an obligation which was actually payable by the assessee.

(iii) Value of any benefit/amenity granted free or at concessional rate to specified employees etc.

(iv) 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 assesssee.

(v) The amount of any contribution to an approved superannuation fund by the exployer in respect of the assessee, to the extent it exceeds one lakh rupees; and

(vi) the value of any other fringe benefit or amenity as may be prescribed.

4. Valuation of Perquisites

As a general rule, the taxable value of perquisites in the hands of the employees is its cost to the employer. However, specific rules for valuation of certain perquisites have been laid down in Rule 3 of the I.T. Rules. These are briefly given below.

4.1 Valuation of residential accommodation provided by the employer:-

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

(b) Non-Govt. Employees- The value of perquisite is an amount equal to 15% of the salary in cities having population more than 25 lakh, (10% of salary in cities where population as per 2001 census is exceeding 10 lakh but not exceeding 25 lakh and 7.5% of salary in areas where population as per 2001 census is 10 lakh or below). In case the accommodation provided is not owned by the employer, but is taken on lease or rent, then the value of the perquisite would be the actual amount of lease rent paid/payable by the employer or 15% of salary, whichever is lower. In both of above cases, the value of the perquisite would be reduced by the rent, if any, actually paid by the employee.

4.2 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 TV/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.

4.3 Value of hotel accommodation provided by the employer-

The value of perquisite arising out of the above would be 24% of salary or the actual charges paid or payable to the hotel, whichever is lower. The above would be reduced by any rent actually paid or payable 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.

4.4 Perquisite of motor car provided by the employer–

W.e.f. 1-4-2008, if an employer providing such facility to his employee is not liable to pay fringe benefit tax, the value of such perquisite shall be :

1. If motor car is owned or leased by the employer

a) Used exclusively for official purpose

If the car is used for only official purpose, it will not be taxable in the hands of employee irrespective of cubic capacity of engine.

b) Used for both official and personal purpose

i) If running and maintenance cost is reimbursed by the employer

Cubic Capacity within 1.6 litre – Rs 1,800 p.m. + Rs 900 p.m. (If driver is provided)

Cubic Capacity exceeding 1.6 litre – Rs 2,400 p.m. + Rs 900 p.m. (If driver is provided)

ii) If running and maintenance cost is reimbursed by the employee

Cubic Capacity within 1.6 litre – Rs 600 p.m. + Rs 900 p.m. (If driver is provided)

Cubic Capacity exceeding 1.6 litre – Rs 900 p.m. + Rs 900 p.m. (If driver is vided)

c) Used exclusively for personal purpose

If the car is used for only personal purpose, it will be fully taxable in the hands of employee irrespective of cubic capacity of engine.

The taxable value is as under:

Actual cost of Running and Maintenance of motor car

Plus: driver’s salary

Plus: normal wear and tear @10% per annum of the actual cost of motor car

Less: any charges recovered from the employee

If motor car is owned by the employee but running and maintenance and driver’s salary reimbursed by employer:

a) Used exclusively for official purpose

If the car is used for only official purpose, it will not be taxable in the hands of employee irrespective of cubic capacity of engine.

b) Used for both official and personal purpose

If running and maintenance cost is reimbursed by the employer

Cubic Capacity within 1.6 litre – Actual expenses less Rs 2,700 p.m.

Cubic Capacity exceeding 1.6 litre – Actual expenses less Rs 3,300 p.m.

If Employee owns any other automotive conveyance but running and maintenance is reimbursed by employer

a) Used exclusively for official purpose

If the car is used for only official purpose, it will not be taxable in the hands of employee if cubic capacity of engine is within 1.6 litre.

b) Used for both official and personal purpose

If running and maintenance cost is reimbursed by the employer

Cubic Capacity within 1.6 litre – Actual expenses less Rs 900 p.m.

Cubic Capacity exceeding 1.6 litre – Not Applicable

4.5 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. However, any payment received from the employee towards the above would be reduced from the amount [Rule 3(4)]

4.6 Free/Concessional Educational Facility: Value of the perquisite would be the expenditure incurred by the employer.

If the education 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)].

4.7 Free/Concessional journeys provided by an undertaking engaged in carriage of passengers or goods:

Value of perquisite would be the value at which such amenity is offered to general public as reduced by any amount, if recovered from the employee. However, these provisions are not applicable to the employees of an airline or the railways.

4.8 Provision for sweeper, gardener, watchman or personal attendant:

The value of benefit resulting from provision of any of these shall be the actual cost borne by the employer in this respect as reduced by any amount paid by the employee for such services. (Cost to the employer in respect to the above will be salary paid/payable). [Rule 3(3)].

4.9 Value of certain other fringe 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 Previous Year in respect of loans of the same type and for same purpose advanced by it to general public. Perquisite 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-

The perquisite value in respect of free food and non-alcoholic beverages provided by the employer, not liable to pay fringe benefit tax, to an employee shall be the expenditure incurred by the employer as reduced by the amount paid or recovered from the employee for such benefit or amenity. However, no perquisite value will be taken if food and non-alcoholic beverages are provided during working hours and certain conditions specified under Rule 3(7)(iii) are satisfied.

(c) Value of gift or voucher or token–

The perquisite value in respect of any gift, or voucher, or taken in lieu of which such gift may be received by the employee or member of his household from the employer, not liable to pay fringe benefit tax, shall be the sum equal to the amount of such gift, voucher or token. However, no perquisite value will be taken if the value of such gift, voucher or taken is below Rs. 5000- in the aggregate during the previous years.

(d) Credit card provided by the employer–

The perquisite value in respect of expenses incurred by the employee or any of his household members, which are charged to a credit card provided by the employer, not liable to pay fringe benefit tax, which are paid or reimbursed by such employer to an employee shall be taken to be such amount paid or reimbursed by the employer. However, no perquisite value will be taken if the expenses are incurred wholly and exclusively for official purposes and certain conditions mentioned in Rule 3(7)(v) are satisfied.

(e) Club membership provided by the employer–

The perquisite value in respect of amount paid or reimbursed to an employee by an employer, not liable to pay fringe benefit tax, against the expenses incurred in a club by such employee or any of his household members shall be taken to be such amount incurred or reimbursed by the employer as reduced by any amount paid or recovered from the employee on such account. However, no perquisite value will be taken if the expenditure is incurred wholly any exclusively for business purposes and certain conditions mentioned in Rule 3(7)(vi) are satisfied.

4.10 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.

4.11 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 as follows:-

(a) In a case where,on the date of 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 the date on the said stock exchange.

(b) In a case where, on the date of exercising of the option, the share in the company is not listed on a recognized stock exchange, the fair market value shall be such value of the share in the company as determined by a merchant banker on the specified date.

(c) 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.

5. Perquisites Exempt From Income Tax

Some instances of perquisites exempt from tax are given below:

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

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

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/-

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

6. Allowances

Allowance is defined as a fixed quantity of money or other substance given regularly in addition to salary for meeting specific requirements of the employees. As a general rule, all allowances are to be included in the total income unless specifically exempted. Exemption in respect of following allowances is allowable to the extent mentioned against each :-

6.1 House Rent Allowance:- Provided that expenditure on rent is actually incurred, exemption available shall be the least of the following :

(i) HRA received.

(ii) Rent paid less 10% of salary.

(iii) 40% of Salary (50% in case of Mumbai, Chennai, Kolkata, Delhi) Salary here means Basic + Dearness Allowance, if dearness allowance is provided by the terms of employment.

6.2 Leave Travel Allowance: The amount actually incurred on performance of travel on leave to any place in India by the shortest route to that place is exempt. This is subject to a maximum of the air economy fare or AC 1st Class fare (if journey is performed by mode other than air) by such route, provided that the exemption shall be available only in respect of two journeys performed in a block of 4 calendar years.

6.3 Certain allowances given by the employer to the employee are exempt u/s 10(14). All these exempt allowance are detailed in Rule 2BB of Income-tax Rules and are briefly given below:

For the purpose of Section 10(14)(i), following allowances are exempt, subject to actual expenses incurred:

(i) Allowance granted to meet cost of travel on tour or on 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 expenses 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) Allowance granted to meet expenditure on purchase/ maintenance of uniform for performance of official duty.

Under Section 10(14)(ii), the following allowances have been prescribed as exempt.

S. No.	Type of Allowance	Amount exempt
1.	Special Compensatory Allowance for hilly areas or high altitude allowance or climate allowance.	Rs.800 common for various areas of North East, Hilly areas of U.P., H.P. & J&K and Rs. 7000 per month for Siachen area of J&K and Rs.300 common for all places at a height of 1000 mts or more other than the above places.
2	Border area allowance or remote area allowance or a difficult area allowance or disturbed area allowance.	Various amounts ranging from Rs.200 per month to Rs.1300 per month are exempt for various areas specified in Rule 2BB.
3	Tribal area/Schedule area/Agency area allowance available in M.P., Assam, U.P., Karnataka, West Bengal, Bihar, Orissa, Tamilnadu, Tripura	Rs.200 per month.
4	Any allowance granted to an employee working in any transport system to meet his personal expenditure during duty performed in the course of running of such transport from one place to another place.	70% of such allowance upto a maximum of Rs.10000 per month.
5	Children education allowance.	Rs. 100 per month per child upto a maximum 2 children.
6	Allowance granted to meet hostel expenditure on employee’s child.	Rs.300 per month per child upto a maximum two children.
7	Compensatory field area allowance available in various areas of Arunachal Pradesh, Manipur Sikkim, Nagaland, H.P., U.P. & J&K.	Rs.2600 per month.
8	Compensatory modified field area allowance available in specified areas of Punjab, Rajsthan, Haryana, U.P., J&K, H.P., West Bengal & North East.	Rs. 1000 per month
9	Counter insurgency allowance to members of Armed Forces.	Rs.3 900 Per month
10	Transport allowance granted to physically disabled employee. This is allowed to an employee, who is blind or deaf and dumb or orthopedically 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.	Rs. 3200 per month.
11	Underground allowance granted to an employee working in under ground mines.	Rs.800 per month.
12	Special allowance in the nature of high altitude allowance granted to members of the armed forces.	Rs. 1060 p.m. (for altitude of 9000-15000 ft.) Rs.1600 p.m. (for altitude above 15000 ft.)
13	Any special allowance granted to the members of the armed forces in the nature of special compensatory highly active field area allowance	Rs. 4,200/- p.m.
14	Special allowance granted to members of armed forces in the nature of island duty allowance.(in Andaman & Nicobar& Lakshadweep Group of Islands)	Rs. 3,250/- p.m.

Republished with Amendments