INCOME FROM SALARIES

The term ‘salary’ has been defined differently for different purposes in the Act. The
definition as to what constitutes salary is very wide. It is an inclusive definition and
includes monetary as well as non-monetary items.
‘Salary’ under section 17(1), includes the following:
(i) wages,
(ii) any annuity or pension,
(iii) any gratuity,
(iv) any fees, commission, perquisite or profits in lieu of or in addition to any
salary or wages,
(v) any advance of salary,
(vi) leave salary or leave encashment,
(vii) the annual accretion to the balance of recognised provident fund to the
extent it is taxable
(viii) the contribution made by the Central Government or any other under a
pension scheme referred to in section 80CCD

Charging Provision – Section 15

a) Salary received by an employee from employer whether due or not
b) Salary due to an employee from his employer whether received or not
c) Arrears of salary

TAXABILITY OF ALLOWANCES GIVEN TO EMPLOYEES

A. Fully exempted Allowances

1) Allowance paid by Government to Indian citizen serving outside India – 10(7)

2) Allowances to high court Judges and sumptuary allowance to high court & supreme
judges
3) Allowances including salary received by employee of UNO
4) Allowances received by member of parliament or State legislature u/s 10(17)

B .Allowances partially exempt u/s 10(14)

1. The following allowances are exempt to the extent actually spent for the purpose given:
a) Travel allowance to meet the cost of travel on tour or transfer
b) Conveyance allowance to meet the conveyance expense on official duties
c) Daily allowance on official tour or for period of journey in connection with transfer
d) Helper allowance
e) Academic/research allowance
f) Uniform Allowance
2. The following allowances are exempt to the extent of amount specified
Nature of allowance Amount exempted
a) Children education allowance Rs.100 per month per child max 2 children

b) Children hostel expenditure Rs.300 per month per child max 2 children
allowance

c) Tribal area allowance Rs.200 per month in the states of MP, Kar, TN,
WB, Assam, Orissa, Bihar etc

d) Transport allowance for Rs.1600 per month. In case of physically

commuting between place of handicapped Rs.3,200 per month
residence and office

e) Transport allowance to an Rs.10,000 PM or 70% of allowance whichever is

employee working in transport lower
undertakings

f) Border area allowance Rs.200 to 1300 PM on basis of area of posting

g) High altitude allowance Rs.1,060 PM for altitude of 9000 ft to 15000ft

and Rs.1,600 PM above 15000 ft

h) Underground allowance Rs.800 PM for employees working in coal mines

i) Island duty allowance given to Rs.3,250 PM in Andaman, Nicobar & lakshdweep

armed forces

j) Counter insurgency allowance Up to Rs.3,900 per month depends on posting

given to armed forces

3. House Rent Allowance: Sec 10(13A) - HRA exempt from tax to the extent of least of
the following three amounts:
a) House Rent Allowance actually received by the assessee
b) Excess of rent paid by the over 10% of salary for relevant period
c) An amount equal to 50% of salary (If accommodation is situated in Mumbai,
Kolkata, Delhi, Chennai) ‘Or’ an amount equal to 40% of salary (if
accommodation is situated in any other place) for relevant period
Salary for this purpose includes Basic Salary, Dearness Allowance (if it forms part of
salary for the purpose of retirement benefits), Commission based on fixed percentage of
turnover achieved by the employee

4. Entertainment Allowance: As Deduction given from gross salary only for Government
employees to the extent of least of Rs. 5,000/-; or 1/5th of basic salary or Actual E/A

C. Fully taxable allowance: All the allowances except above by whatever name called
are fully taxable. Such allowances include : Dearness Allowance, medical allowance,
City compensatory allowance, lunch allowance, overtime allowance, servant allowance,
non practicing allowance, family allowance etc.,
 PERQUISITE
Perquisite - Definition
The term ‘perquisite’ is defined by section 17(2) to include the following:
a) the value of rent free accommodation
b) The value of any concessional Rent free accomodation
c) The value of any benefit or amenity granted or provided free of cost or at
concessional rate in any of the following cases in case of specified employees
(i) by a company to an employee in which he is a director;
(ii) by a company to an employee being a person who has substantial interest in
the company (i.e. 20% or more of the voting rights of the company);
(iii) by any employer (including a company) to an employee to whom the
provisions of (i) & (ii) do not apply and whose income under the head
‘salaries’ (whether due from, or paid or allowed by, one or more employers)
exclusive of the value of all benefits or amenities not provided for by way of
monetary benefits exceeds 50,000
d) Any sum paid by the employer in respect of any obligation of employee
e) Any sum to effect an assurance on the life of the assessee or to effect a contract
other than a recognised provident fund or approved superannuation fund or
deposit-linked insurance fund
f) the value of any specified security or sweat equity shares free of cost or at
concessional rate.
g) the amount of any contribution to an approved superannuation fund to the extent
it exceeds 1 lakh
h) the value of any other fringe benefit or amenity as may be prescribed by the CBDT

Exempted perquisite
The following perquisites are exempt from tax in all cases -
1) Telephone provided by an employer to an employee at his residence;
2) Goods sold by an employer to his employees 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) Employer’s contribution to staff group insurance scheme;
6) Leave travel concession subject to conditions u/s 10(5)
7) Payment of premium on personal accident policy on the life of the employee;
8) Refreshment provided to all employees during working hours in office premises;
9) Subsidized lunch or dinner provided to an employee;
10) Recreational facilities, including club facilities, extended to employees in general
i.e., not restricted to a few select employees;
11) Amount spent on training of employees or amount paid for refresher management
course including expenses on boarding and lodging;
12) Medical facilities subject to certain prescribed limits;
13) Rent-free official residence provided to a Judge of a High Court or the Supreme
Court; Officer of Parliament, Union Minister and a Leader of Opposition in
Parliament;
14) Conveyance facility provided to High Court Judges under section 22B of the High
Court Judges (Conditions of Service) Act, 1954 and Supreme Court Judges under
section 23A of the Supreme Court Judges (Conditions of Service) Act, 1958.
 Valuation of Perquisites under Rule 3

1. ACCOMODATION

Category of Where accommodation is Where   Where

Employer unfurnished accommodation is accommodation is
furnished in hotel
Accommodation License     fee The value as 24% of salary or
provided by determined               by determined in actual charges paid
Central/State Central/State  government unfurnished whichever is lower
Government accommodation plus Less: Amount, if
Less: Rent Actually paid  10% of the cost of any recovered from
by employee furniture. In case of the employee
furniture is rented –
Actual hire charges
Less: Amount, if any
recovered from the
employee
Accommodation A) Where accommodation is A & B) The value as 24% of salary or
provided   by  owned by employer determined in actual charges paid
any other a)    15% of salary in cities unfurnished whichever is lower
employer having population  accommodation plus
exceeding    25 lakhs as per 10% of the cost of Less: Amount, if any
2001 census furniture. In case of recovered from the
b)      10% of salary in cities furniture is rented – employee
having population exceeding Actual hire charges
10 lakhs but not exceeding
25 lakhs as per 2001 census Less: Amount, if any
c) 7.5% of salary in other recovered from the
case employee
B) Where accommodation
is taken on lease or rent
by the employer
Actual amount of lease
rental paid or payable by the
employer or 15% of salary
whichever is lower
Less: Rent, if any actually
paid by the employee
Salary = Basic + DA (forming part of retirement benefits)+taxable value of allowance +
all monetary payments by whatever name called, but shall not include value of
perquisite and employer’s contribution to RPF.

Exempted Accommodations :

1) Accommodation provided in rural area provided to an employee working at

mining site or an onshore oil exploration site, or a project execution site or a
dam site or power generation site or an offshore site. Remote area means an
area located at least 40 kilometers away from a town having population of not
exceeding 20,000
2) Accommodation of temporary nature having plinth area of 800 sft or less and
located at least 8 km away from the local limits of municipality or cantonment
 board provided to an employee working at a mining site or an onshore oil
exploration site or a project site or a dam site or a power generation site or an
offshore site is not chargeable
3) Where on account of transfer of an employee, he is provided with
accommodation at the new place of posting while retaining the accommodation
at other place, the value of perquisite in respect of one accommodation at the
option of employee is not chargeable.
4) Hotel accommodation provided to an employee on account of transfer from one
place to another, is not chargeable if the aggregate period does not exceed 15
days

2. MOTOR CAR AND OTHER AUTOMOTIVE

WHOLLY PRIVATE PURPOSE PARTLY OFFICIAL & PARTLY PRIVATE

A. Car owned by the employee and expenses are reimbursed by the employer
Actual expenses of employer  1. calculate actual expenditure on by employer 
2. LESS : if car hp <= 16, perquisite is Rs.1800
less: amount recovered from the p.m. if hp>16 Rs.2400 p.m. with Rs.900 p.m. if
employee chauffeur provided, or higher sum as recorded
by logbook by employer 
3. Less :amount recovered from the employee (if
any)
B. Car is owned/ hired by the employer and expenses met by the employer
1. Actual Expenses by employer 1. if car hp < =16, perquisite is Rs.1800 p.m.,
including chauffeur Salary 2. if hp>16 Rs.2400 p.m.
2. Plus  depreciation (10% of the 3. in any case Rs.900 p.m. if chauffeur
original cost of car)/ hire provided
charges(if car is hired)  Note : nothing is deductible in respect of any
3. Less :amount recovered amount recovered from employee.
C. Car is owned/ hired by the employer and expenses met by the employee
1. Depreciation(10 % of the 1. If car hp < =16, perquisite is Rs.600 p.m.,
original cost of the car)/ 2. if hp>16 Rs.900 p.m.
hire charges + chauffeur 3. in any case Rs.900 if chauffeur provided
salary. Note :nothing is deductible in respect of any amount
2. less : amount recovered recovered from employee.
from the employee
D. Any other Automotive owned by employee and expense met by employer
Not applicable 1. actual expenditure on by employer 
2. LESS : Rs. 900 per month.

1. Conditions to be satisfied for a claim that Car is used for official purpose
OR the actual amount of expense on motor car owned by employee is more
than prescribed deduction:
a) The employer has maintained complete details of journey undertaken for offcial
purpose which may include date of journey, destination, mileage, and the
amount of exepnditure 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
c) Content of log book - complete details of the journey such as date of journey
destination, mileage and amount of the expenditure incurred.
 d) The priciple of Arms length price will apply while cars taken from related
parties.
2. Where more than one car is being provided for use for employee or
member of his family then valuation on one car will be as partly used for
official purpose and partly for private purpose and other car will be valued as
fully used for private purpose.
3. Car facility between office to residence and back is not chargeable to tax at all.

OTHER PERQUISITES

PERQUISITE VALUATION
Sweeper,                   gardener, Actual cost to the employer
watchman,                   personal Less: Amount recovered if any
attendant
Supply   of    gas, electric energy,
Water
a) From own source Manufacturing cost
b) From outside source Actual expenditure incurred   or reimbursement
Less: Amount, if any recovered
Fee     or concessional
Educational  facilities for Actual expenditure or reimbursement
any           member  of Less: Amount, if any recovered
employees household
Interest free Interest amount, as per SBI rates as on 1 st day of
Concessional
loan                 previous year on maximum outstanding monthly
balance
Less: Interest recovered employee,
(Petty loan upto Rs. 20,000 or loan for medical
treatment in respect of diseases specified under
Rule3A not taxable provided not reimbursed under
any Medical Insurance Scheme)
Amount of expenditure incurred by the employer
Less: Amount recovered from the employee
Free  food  and         non (if employer provides free food and Non alcoholic
alcoholic beverages beverages during the office working hour at office
premises or through paid voucher and amount of
expenditure not exceeding Rs. 50 per meal.)
Gifts/Vouchers or token to Value of such gift
employees However, such value to be considered Nil, if the value
of gift per employee during the previous year in
aggregate is below Rs. 5,000.
Memberships and annual fees Actual amount of expenditure or reimbursement
Less: Amount, if any recovered from the employee
for such benefit or amenity.
Note: However, there will be no perquisite in the
hands of employees if complete detail in respect of
such expenditure are maintained by the employer &
the employer gives the certificate to the effect that the
expenditure was incurred wholly and exclusively for
the performance of official duties.
Use of movable assets (other 10% of actual cost of the asset or the amount of rent
than Laptops) paid or payable
Less: Amount, if any recovered
Transfer      of              movable Actual cost of movable asset
asset         to the        employee Less: 10% of depreciation for each completed year
direct or indirectly which such assets was put to use by the employer
(In case of computer and electronic items 50 percent
and motor car 20 percent by reducing balance
method)
Less: Amount, if any recovered
Any             other benefits      or Cost to employer (based on arm’s length transaction)
amenities, services, rights or Less: Amount, if any recovered
privilege Note: Expenses on telephone mobile phone actually
incurred on behalf of the employee by the employer
not to be taxed.
Equity stock           options Fair Market Value of the specified securities or
scheme (ESOP) sweat Equity Share on the date on which the option
SEE NOTE BELOW is exercised by the employee
Less: Amount, if any recovered

Note : For determining the fair market value, Rule 3(8) prescribes method for
determining the fair market value of specified security or Sweat Equity Share on the
date on which the option is exercised by the employee is as follows:

a) In case where the company is listed on the recognized stock exchange, the fair
Market shall be average of the opening price and closing price of the share on
the date of exercising option on the stock exchange.
b) Where the share is listed on more than one recognized stock exchanges, FMV
shall be average of the opening price and closing price of the share on the date
of exercising option on the recognized stock exchange which records highest
volume of trading in the shares.
c) Where there is no trading in the share on any recognized exchange, Fair Market
Value shall be the value of the share in company as determined by a merchant
banker on the date of exercising option.

Medical Facilities
Expense incurred or reimbursed by the employer for the medical treatment of the
employee or his family (spouse and children, dependent – parents, brothers and
sisters) in any of the following hospital is not chargeable to tax in the hands of the
employee:
a) Hospital maintained by the employer.
b) Hospital maintained by the Government or Local Authority or any other
hospital approved by Central Government
c) Hospital approved by the Chief Commissioner having regard to the prescribed
guidelines for treatment of the prescribed diseases.
d) Medical insurance premium paid or reimbursed by the employer.
e) Any other expenditure incurred or reimbursed by the employer for providing
medical facility in India up to Rs. 15,000 in aggregate.
f) Expenditure on medical treatment outside India, including stay expenses for
patient and one attendant to the extent permitted by RBI. Travel expenses
exempted only if he Gross total income of the employee is less than
Rs.2,00,000/-
 PROFITS IN LIEU OF SALARY

Exemption for Gratuity Received :

1. While in Service

Fully Taxable

2. On Death or Retirement

(A) Government Employees

Fully Exempt

(B) Other Employees

(a) Covered by Payment of Gratuity Act, 1972

Least of the following is exempt

 Rs.10,00,000/-
 15 / 26 x Last Drawn Salary x Completed Years of Service
 Gratuity Received

(b) Not Covered by Payment of Gratuity Act, 1972

Least of the following is exempt

 Rs.10,00,000/-
 1 / 2 x Last Drawn Salary x Completed Years of Service
 Gratuity Received

Note: -

a. Where gratuity is received more than once, either from more than one employer in
the same previous year, or, over several previous years, then the total gratuity
exemption cannot exceed the statutory limit, i.e., Rs.10,00,000/-.

b. In the case of the Gratuity payment covered by Payment of Act: -

 last drawn salary means Basic Pay + Dearness Allowance, provide.

 completed year of service means each completed year of service or part of the
year in excess of 6 months.

c. In the case of the Gratuity payment NOT covered by Payment of Act: -

o last drawn salary means Basic Pay + Dearness Allowance, if terms of

employment provide + Commission as a Fixed Percentage on Turnover. Should
be taken as an average of last 10 months salary.
 o completed year of service means each completed year of service and part of the
year is ignored.

Pension [Section 10(10A) & 10(18)(i)]

1. Un-commuted Pension – Regular pension

Fully Taxable

2. Commuted Pension

(A) Government Employee

Fully Exempt

(B) Other Employees

(a) Receiving Gratuity Also

One-third of the Total Commuted Pension is exempt

(b) Not Receiving Gratuity

Half of the Total Commuted Pension is exempt

Leave Salary Exemption [Section 10(10AA)]

The Salary Exemption in respect of leave salary is to be computed by carrying out the
following steps:

 Calculate the leave to the credit of the employee as under: -

Completed year of service (Ignore Fraction) x 1 month xxx

xxx
Less: Leave taken by the employee
---
xxx
Leave to the credit of the employee
---

 Calculate the last drawn salary based on last 10 months average.

Basic Pay xxx

Dearness Allowance (if terms of employment provide) xxx
xxx
Commission as a Fixed Percentage on Turnover
---
Last Drawn salary xxx
---
  Exemption Available:

1. Leave Salary Received While in Service

Fully Taxable

2. Leave Salary Received On Retirement

(A) Government Employee and cases where amount is received by Legal heirs on
the death of employee

Fully Exempt

(B) Other Employees

Least of the following is exempt:

oRs.3,00,000
o10 months salary
oCash equivalent of the leave to the credit of the employee
oActual leave salary received
 Where leave salary is received more than once, either from more than one
employer in the same previous year, or, over several previous years, then the
total leave salary exemption cannot exceed the statutory limit, i.e.,
Rs.3,00,000/-.

Retrenchment Compensation Exemption [Section 10(10B)]

Salary Exemption for Retrenchment Compensation Received:

1. Under a scheme approved by Central Government

Fully Exempt

2. Others

Lower of the following is exempt:

 Amount determined as per the Industrial Dispute Act, 1947

 Rs.5,00,000.

Salary Exemption for Voluntary Retirement Compensation u/s

[Section 10(10C)]

 Salary Exemption for Voluntary Retirement/Separation is available only to

assessees, who are employees of the following employers: -
 1. Public Sector Company
2. Statutory Corporations
3. Any other Company
4. University
5. Indian Institute of Technology
6. Notified Institute of Management
7. Any State Government
8. The Central Government of India
9. Local Authority
10.Co-operative Societies
11.Specially Notified Persons or Any other Institution, having importance
throughout India or in any State or States, notified by Central
Government of India
 Exemption is available only if the Scheme framed by Employer for VR fulfills the
following conditions: -

o It applies to an employee who has completed 10 years of service or

attained the age of 40 years [Condition not applicable to Voluntary
Separation Schemes framed by Public Sector Undertakings).
o It applies to all employees including workers and executives of a
company or of an authority or of a co-operative society but excluding
directors of a company or of a co-operative society.
o It results in overall reduction in the existing strength of the employees.
o The vacancy caused by it is not filled up.
o The retiring employees are not employed in another company or concern
belonging to the same management.
o Voluntary Retirement Compensation is computed as under

Last drawn salary x 3 x completed year of service, Or

Last drawn salary x remaining months of service

For this purpose, Last drawn Salary = (Basic Pay + Dearness Allowance (if
terms of employment provide) + Commission as a Fixed Percentage on
Turnover) of the last month before Voluntary Retirement.

 The quantum of salary exemption is least of the following: -

o Last drawn salary x 3 x completed year of service (or) Last drawn salary x
remaining months of service, whichever is higher.
o Actual voluntary retirement compensation received.
o Rs.5,00,000.
 Exemption is available only once in the lifetime of an employee.
Salary Exemptions for Provident Funds
[Section 10(11), 10(12) & 10(13)]

Particulars SPF/PPF RPF URPF ASAF

Section
10(11) 10(12) - 10(13)
Reference
Employer's Exempt to Not Taxable in
Contribution to Not Taxable the extent of the year of Not Taxable
the Fund 12% of Salary Contribution
Employee's Deduction Deduction Deduction
No Benefit
Contribution to u/s 80C u/s 80C u/s 80C
Available
the Fund available available available
Exempt up to Not Taxable at
Interest Credited
Exempt 9.5% rate of the time of Exempt
to the Fund
Interest Credit
Lump sum
Exempt Taxable fully as Exempt
amount
Exempt subject to per Note 2 subject to
withdrawn from
Note 1 below below Note 3 below
the Fund

Note: -

1. The accumulated balance due and becoming payable to an employee

participating in a Recognised Provident Fund is exempt only under the following
circumstances: -
o In the case of an employee who has been in service for a continuous
period of at least 5 years.
o In case the employee has not rendered service for a continuous period of
5 years, then: -
 if his retirement is due to
o Ill-health
o Contraction or discontinuance of the employer's business
o Other reasons beyond the control of the employee
2. Any payment made under the Unrecognised Provident Fund is taxable as
under: -
o To the extent of Employer's Contribution and Interest thereon, taxable as
"Salaries".
o To the extent of Employee's Contribution - not taxable. However, Interest
thereon is taxable as "Income from Other Sources".
3. Any payment made from an ASAF is exempt in the following circumstances: -
o On the death of a beneficiary; or
o By way of refund of contributions on his death; or
o To an employee in lieu of or in commutation of an annuity
 On his retirement at or
 After a specified age or
 On his becoming incapacitated prior to such retirement, or Refund
of contributions prior to 01.04.1962, on such event
Leave Travel Concession Section 10(5):
Leave Travel Concession or Assistance (LTC/LTA), extended by an employer to an
employee for going anywhere in India along with his family subject to following
conditions:
1) The exemption shall be limited to fare for going anywhere in India along with
family twice in a block of four calendar years comprising of 2002-2005; 2006-
2009; 2010-2013; 2014-2017. If LTC is not fully utilized in a block of 4
calendar years, the same can be carried over to next block to be used in First
Year of subsequent block.
2) Where journey is performed by Air – Exemption up to Air fare of economy class
in the National Carrier by the shortest route
3) Where journey is performed by Rail – Exemption up to air-conditioned first
class rail fare by the shortest route
4) If places of origin of journey and destination are connected by rail but the
journey is performed by any other mode of transport – Exemption up to air-
conditioned first class rail fare by the shortest route
5) Where the places of origin of journey and destination are not connected by rail:
- Where a recognized public transport system exists – Exemption up to
first Class or deluxe class fare by the shortest route
- Where no recognized public transport system exists – Exemption up to
air conditioned first class rail fare by shortest route