TAX LAW UNIT 2 NOTES

Unit -II: Residential Status, Chargeability

a. Meaning and Rules for Determining Residential status of an Assessee
b. Charge of Income Tax and Scope of Total Income
c. Income Exempted from Tax and Deduction under Income Tax Law (not coming)
d. Heads of Income and its Justification (not coming)
e. Tax Treatment to Salary, Perquisites etc

CHARGE OF INCOME TAX AND SCOPE OF TOTAL INCOME

Section 4 of the Act talks about Charge of Income Tax. It is the backbone of the act and it’s the basis on
which the Income Tax is charged. It is due to this section that the other sections of the aft become
enforceable.
No tax can be levied or collected in India except under the authority of law. Section 4 of the Income-tax
Act, gives such authority for charging of income-tax. The base for levy of tax in any assessment year is
normally the income of the previous year.
However, in some cases, income-tax may be charged in respect of the income of a period other than the
previous year. Although income-tax is charged on the income of the previous year in the relevant
assessment year, but Income-tax shall be deducted at the source, or paid in advance, in the same previous
year wherever it is so deductible or payable under any provisions of the Act.
So, section 4 lays down 4 important criteria:
- What is taxable? - total income
- In whose hands? - person
- At which rate? - at any given rate in the finance act
- For which period? - the previous year in the assessment year.
Scope of Total Income/ Incidence of Tax- s. 5
(1) The total income of any PY of a person who is a resident includes all income from whatever source
derived which-
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section
(6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it
is derived from a business controlled in or a profession set up in India.
(2) The total income of any previous year of a person who is a non-resident includes all income from
whatever source derived which-
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Explanation 1. - Income accruing or arising outside India shall not be deemed to be received in India
within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet
prepared in India.
Explanation 2. - For the removal of doubts, it is hereby declared that income which has been included in
the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or
arisen to him shall not again be so included on the basis that it is received or deemed to be received by
him in India.
In C.I.T. v. Shooji Vallabhdas & Co. (1962) 46 ITR 144 (SC), it was held that when there is neither
accrual nor receipt, an entry in the books is not enough to charge tax. Income-tax is a tax on income. No
doubt the Income-tax Act takes into account two points of time at which the liability to tax is attracted,
namely the accrual of income or its receipt, but the substance of the matter is income.

Section 7- Income received or deemed to be received in India.

Income received in India Income deemed to be received in India
- Income which is received in India during Following incomes shall be deemed to be received
PY by an assessee is liable to tax in India in India in PY even in absence of actual receipts:
irrespective of the residential status and - Contribution made by the employer to the
the place of accrual of such income. recognized provident fund in excess of
- Receipt means FIRST RECIEPT- Receipt 12% of the salary of the employee.
of income is the first occasion when the E.g.: If salary of the employee is 10Lakhs,
recipient gets the money under his control then 12% of 10L is 1.2L. However, if the
 - Once an amount is received as income, contri made by employee is 15% i.e. in
any transaction/transmission/remittance, to excess of 12% then 15% of 10L is 1.5L.
another place does not result in under this So, accordingly, the excess would be
clause. deemed to be income received in India
- Income is said to be received when the which will be 30K.
income reaches the assessee and can be
assessed. - Interest credited to the RPF (Recognized
Provident Fund)of the employee which is
This principle is of importance: in excess of 9.5% p.a.
1) in determining the year of receipt, and E.g.: If salary is 10L and interest is 9.5%
2) for ascertaining the incidence of taxation then the amount will be 95K. However, if
where it depends purely upon receipt of 10% int is given then 10% of 10L is 1L.
income. So, excess amount will be Income deemed
For instance, in the case of non-residents, their to be received in India which will be 5K.
income earned outside India is not assessable,
unless it is actually received in India. - Transfer balance from the unrecognized
fund to a Recognized Provident Fund
To be treated as income in India, the money has to
be received in India as income from a foreign - The contribution made, by the Central
source. Government or any other employer in the
previous year, to the account of an
If a non-resident has already received the money employee under a notified contributory
as income outside India, either in the current or a pension scheme referred to in section
previous year, and is now simply transferring it to 80CCD
an account in India, it will not count as income in
the eyes of law.

Section 9- Income which accrue or arise in India or are deemed to accrue or arise in India
 Accrue or Arise in India
'Accrue' connotes growth or accumulation with a tangible shape so as to be receivable.
A person may be said to have 'earned' his income in the sense that he has contributed to its production by
rendering services or otherwise and the parenthood of the income can be traced to him. But so that the
income may be said to have 'accrued' to him, an additional element is necessary, that he must have
created a debt in his favour
Arise means coming into existence or noticed or presenting itself. It is the penultimate step before
accrual. In a secondary sense, the two words together mean 'to become a present and enforceable right'
and 'to become a present right of demand'
 Deemed to accrue or arise in India
The following incomes shall be deemed to accrue or arise in India:
1. Business Connection [S.9(1)(i)]: Any income which arises, directly or indirectly, from any
activity or a business connection in India is deemed to be earned in India.
Business connections may be in several forms e.g. a branch office in India or an agent or an organization
of a non-resident in India. Forming a subsidiary company in India to carry on the business of the non-
resident parent company would also be a business connection in India. Any profit of the non-resident
which can be reasonably attributable to such part of operations carried out in India through business
connections is deemed to be earned in India.
Therefore, it includes a person acting on behalf of the non-resident and performing the following
functions:
 - He has the authority & ability to conclude contracts on behalf of the non-resident.
- He habitually maintains in India a stock of goods or merchandise and delivers them on behalf of
non-resident.
- He habitually secures orders in India on behalf of the non-resident.
The following will not be considered as business connections:
- Operations confined to purchase of goods in India for the purpose of exports.
- Operations confined for collection of news and views for transmission outside India by or on
behalf of non-resident who is engaged in the business of running news agency or of publishing
newspapers, magazines or journals.
- Operations confined to shooting of cinematograph films in India.
- Operations confined to mining of diamonds, which are displayed in special zone notified by the
central government

2. Significant Economic Presence

If a non resident engages in a transaction with a person resident in India in respect of any goods, services
or property, including the provision of download of data or software, when the payments arising from
such transaction exceeds two crores in a year.
If the non resident is engaged in soliciting business activities or engaging with uses in India when the
number of users is at least 3 lakhs
3. Income from any property, asset or source of income situated in India

4. Income from the transfer of any capital asset situated in India: Where the capital asset is
situated in India, regardless of the residential status of the transferor or the transferee, capital gain,
arising on its transfer, would be deemed to be income accruing or arising in India and hence
would be taxable.

5. Any income which falls under the head 'Salaries' if it is earned in India [S.9(1)(ii)]: Any
income payable for services rendered in India shall be regarded as income earned in India though
it may be paid in India or outside.

6. Salary payable by the Government to an Indian citizen/national for services rendered

outside India:
The following conditions have to be satisfied before such income is treated as deemed to accrue or arise
in India:
(1) Income should be chargeable under the head 'Salaries".
(2) The payer should be Government of India;
(3) The recipient should be an Indian citizen whether Resident or Non-Resident;
(4) The services should be rendered outside India.
While salary of Indian citizen in the above case shall be deemed to accrue or arise in India but all
allowances or perquisites paid outside India by the Government to the above Indian citizens for their
rendering service outside India are exempt under section 10(7).
7. Interest payable by:
(i) Government; or
(ii) A person who is a resident in India, except where interest is payable in respect of money
borrowed and used for the purpose of business or profession carried on outside India or
earning any income from any source outside India; or
 (iii) A person who is a non-resident in India provided interest is payable in respect of money
borrowed and (used for a business or profession carried on in India,
shall be income which is deemed to accrue or arise in India in the hands of the recipient.
8. Royalty payable by [S.9(1)(vi)]:
(i) Government; or
(ii) A person who is a resident in India except where it is payable in respect of any
right/information/ property used for the purpose of a business or profession carried on
outside India or earning any income from any source outside India; or
(iii) A person who is a non-resident provided royalty is payable in respect of any
right/information/ property ( used for the purpose of the business or profession carried on
in India or earning any income from any source in India,
shall be income which is deemed to accrue or arise in India in the hands of the recipient.
9. Fees for technical services payable by:
(i) Government; or
(ii) A person who is a resident in India, except where services are utilised for a business or
profession carried on outside India or earning any income from any source outside India,
or
(iii) A person who is a non-resident provided fee is payable in respect of services for a
business or profession carried on in India or earning any income from any source in India,
shall be income which is deemed to accrue or arise in India in the hands of the recipient.
10. Deemed accrual of gift made to a non-resident/not ordinarily resident [Section 9(viii)]
Vodafone International Holdings BV v. Union of India, 2012 (6) SCC 757
Vodafone International Holding (VIH) and Hutchison telecommunication international limited or HTIL
are two non-resident companies. These companies entered into transaction by which HTIL transferred the
share capital of its subsidiary company based in Cayman Island i.e. CGP international or CGP to VIH.
VIH or Vodafone by virtue of this transaction acquired a controlling interest of 67 percent in Hutch is on
Essar Limited or HEL that was an Indian Joint venture company (between Hutchinson and Essar) because
CGP was holding the above 67 percent interest prior to the above deal.
The Indian Revenue authorities issued a show cause notice to VIH as to why it should not be considered
as “assesse in default” and thereby sought an explanation as to why the tax was not deducted on the sale
consideration of this transaction.
The Indian revenue authorities thereby through this sought to tax capital gain arising from sale of share
capital of CGP on the ground that CGP had underlying Indian Assets.
The Supreme Court deliberated on several aspects in this case however, wrt to Section 9 the issue raised
was Whether an indirect transfer of capital is subject to tax as per section 9 of the Income Tax Act, 1961?
The court in this issue dismissed the rationale of Bombay High Court. The High Court stated there had
been a transfer of "rights and entitlements"3 in addition to the shares. Therefore, such rights fall under the
category of capital assets rendering the transaction taxable.
In furtherance, the Supreme Court stated a "controlling test" and held itwas a responsibility of the
company and it does not hold the value of an independent capital asset. It is a mere incident of ownership
of shares.
The court held that section 9 is a provision where various types of income are deemed to be accrued or
arisen in India. Section 9 (1)(i) covers "all income accrued or arising, either directly or indirectly, through
form or any business connection in India or through or from any property in India, or through or from any
asset or source of income in India, or through the transfer of a capital asset situate in India."
In order to understand the provision, three criteria are defined for a transfer to be taxable.
i. Presence of a capital asset.
ii. Transfer of such asset.
iii. Position of such asset in India.
The court clarified that the phrase “directly or indirectly” does not pertain to the transfer of capital assets
located in India, as doing so would alter the essence of section 9(1)(i). Interpreting “indirect” alongside
section 9(1)(i) would effectively negate the purpose of sub-clause 4. Consequently, the court ruled that
section 9(1)(i) is not a “look-through” provision, thereby rejecting the Income Tax Department’s
argument that the term “through” in clause (i) implies “in consequence of,” deeming this interpretation an
improper application of the statute.
The court further suggested that the location, or situs, of a share cannot be determined by the location of
the underlying asset but rather by the location of the share itself. Additionally, the court briefly referenced
the Direct Taxes Code Bill 2010, which seeks to regulate offshore share transactions. From this, it can be
deduced that section 9(1)(i) does not cover indirect transactions.
MEANING AND RULES FOR DETERMINING RESIDENTIAL STATUS OF AN ASSESSEE

Residential
Status(type)

Resident Non Resident

Not
Ordinarily
Ordinarily nbxjbj
Resident
Resident

Basic Rules for determining Residential Status of an Assessee

- Residential status is determined for each category of persons separately e.g. there are separate set
of rules for determining the residential status of an individual and separate rules for companies,
etc.
- Residential status is always determined for the previous year because we have to determine the
total income of the previous year only.
- Residential status of a person is to be determined for every previous year because it may change
from year to year.
- If a person is resident in India in a previous year relevant to an assessment year in respect of any
source of income, he shall be deemed to be resident in India in the previous year relevant to the
assessment year in respect of each of his other source of income. [Section 6(5)]
- A person may be a resident of more than one country for any previous year. If Y is a resident in
India for previous year 2023-24, it does not mean that he cannot be a resident of any other country
for that previous year.
- Citizenship of a country and residential status of that country are separate concepts. A person may
be an Indian national/citizen, but may not be a resident in India. On the other hand, a person may
be a foreign national/citizen, but may be a resident in India.
- It is the duty of the assessee to place all material facts before the assessing officer to enable him to
determine his correct residential status

RESIDENTIAL STATUS OF AN INDIVIDUAL [SECTION 6(1) & 6(1A)]

An individual is said to be resident in India if he satisfies any one of the following two conditions:
(BASIC)
1. He is in India for a period amounting to 182 days or more in the relevant previous year (6(1)(a))
OR
2. He is in India for 60 days or more during the relevant previous year AND has been in India for 365
days or more during 4 previous years immediately preceding the relevant previous year (6(1)(b))
Exceptions to the Basic Conditions-
Explanation 1(a): In case of an individual, who is a citizen of India and leaves India in any previous year
for the purposes of employment outside India, then only condition 1 applies, and condition No. 2
shall not be applicable for the relevant previous year in which he leaves India. So, basically he should
satisfy only condition no. 1. Similarly, in case of an individual who is a citizen of India and who leaves
India in any previous year as a member of the crew of an Indian ship, condition No. 2 mentioned
above shall not be applicable.
Meaning of employment: The term employment is not defined in the Income-tax Act.
A man may employ himself so as to earn profits in many ways. Thus he can set up an independent
practice abroad or businessman can shift his business activities to a foreign country. A person merely
undertaking tours abroad in connection with his employment in India would not be eligible for the
relaxation provided under exception 1.
In CIT vs Abdul Razak. The court held that the term employment should not be given technical meaning,
that is, self employment, like business or profession, would be covered under this provision
In re British gas India Pvt Ltd, 2006. The requirement is not leaving India for employment, but leaving
India for the purpose of employment outside India. Hence the individual need not to be unemployed
person
Explanation 1(b): In the case of an individual being a citizen of India, or a person of Indian origin, who,
being outside India, comes on a visit to India in any previous year then Condition No.2 applies with
modification:
(i) the period of 60 days the condition No. 2 mentioned above, in relation to that year shall be
substituted by 182 days, if such individual is having total income, other than the income
from foreign sources, NOT EXCEEDING Rs. 15,00,000 during the previous year,
(ii) the period of 60 days the condition No. 2 mentioned above, in relation to that year shall be
substituted by 120 days, if such individual is having total income, other than the income
from foreign sources, EXCEEDING Rs. 15,00,000 during the previous year.
An individual is said to be resident and Ordinarily Resident in India if he satisfies both of the
following two conditions: (ADDITIONAL)
1. He has been resident in India for at least 2 out of 10 previous years immediately preceding the
relevant previous year.
AND
2. He has been in India for 730 days or more, during 7 previous years immediately preceding the
relevant previous year
#IF BOTH CONDITIONS FULFILLED I.E BASIC AND ADDITIONAL THEN INDIVIUAL IS R-OR.
#IF ONLY BASIC FULFILLED AND OTHER NOT THEN HE’S R-NOR
#IFNONE OF THE CONDITIONS ARE FULFILLED THEN HE’S NR [S.2(30)]
#Important explanations
 - Relevant previous year means the previous year for which the residential status is being
determined.
- In computing the period of stay in India, it is not necessary that the stay should be for a
continuous period. What is to be seen is the total number of days' stay in India during the relevant
previous year.
- It is also not necessary that the stay should be only at one place. e.g., he may stay at Bombay for
90 days and then go out of India. On return in the same previous year, he may stay at Delhi for
120 days during the same previous year. His total stay in India will be 210 days for that previous
year.
- In computing the period of 182 days, the day the individual enters India and the day he leaves
India should both be treated as stay in India.
- Place and purpose of stay in India is immaterial. Presence in territorial waters of India would also
be regarded as presence in India.

 STATELESS PERSONS – S.6(1A)- Citizens of India shall be deemed to be resident in India-

This section was inserted by the Finance Act 2020 and it says that an individual who is a citizen of
India and has a total income other than income from foreign sources exceeding Rs. 15 lakhs
during PY will be deemed to be Resident provided he is not liable to pay tax in any other country
or territory by reason of domicile or residence or any other criteria.

*this section shall not apply in case of an individual who is said to be resident under section6(1)
read with expln 1

 Section 6(6)(c)- This was also inserted by the Finance Act 2020. The section says that in case of
the citizen or person of Indian origin having total income, (other than the income from foreign
sources), exceeding ₹15,00,000 during the previous year, if he comes to India for a visit for 120
days but less than 182 days in the previous year, he shall be deemed to be resident but "not
ordinarily resident in India”

RESIDENTIAL STATUS OF AN HUF [SECTION 6(2)]

HUF is resident in India if the control and management of its affairs is wholly or partly situated in India.
HUF is resident and ordinarily resident in India if Karta satisfies the following conditions:
- KARTA is resident in at least 2 out of 10 previous years immediately preceding the relev PY and
- KARTA is in India for at least 730 days during 7 PYs immediately preceding the relev PY
HUF is resident and not ordinarily resident in India if Karta doesn’t satisfies any one or both the
conditions as mentioned above.
HUF is Non-Resident if during PY the control and mgt are wholly situated o/s india.
In the case, Erine State Galah Ceylon vs CIT. The Supreme Court laid down that expression control and
management of affairs means de facto and not merely de jure control and management.
Subayya Chettiar v. CIT AIR 1951 SC 101
Facts: The Karta of a Joint Hindu family had been living in Ceylon with his wife, son and daughters and
they had domiciled in that country, The, karta carried on business in Colombo and owned a house, some
immovable property and investments in British India. In the year of account, 1941-42 he visited British
India on seven occasions for a total period of 101 days. During such stays, he personally attended to a
litigation relating to the family lands and proceedings relating to the assessment of the family income. He
had started two partnership firms in India on 25.3.1942 and remained in India for sometime after the
commencement of those businesses.
Under Section 4A(b) of the Income-tax Act 1922 "a Hindu undivided family, firm or other association of
persons is resident in British India unless the control and management of its affairs is situated wholly
outside British India.
Issue: Whether in the circumstances of the case, the assessee (a Hindu undivided family) was resident in
British India under Section 4A(b) of the Income-tax Act, 1922 [Section 6(2) of the Income-tax Act,
1961)]?
Decision of the Supreme Court: Under Section 4A(b) of the Income- tax Act. 1922 "a Hindu undivided
family, firm or other association of persons is resident in British India unless the control and management
of its affairs is situated wholly outside British India".
The real business is carried on where the central management and Control actually abides. In Swedish
Central Railway Co. Ltd. v. Thompson it was held that the control and management "signifies in the
present context the controlling and directing power, "the head and the brain” as it is sometimes called,
and "situated" implies the functioning of such power at a particular place with some degree of
permanence while wholly would seen to recognise the possibility, of the seat of such power being divided
between two distinct and separated place".
Commenting upon the facts of the case the Supreme Court observed that "the mere fact that the assessee
has a house in British India, where his mother lives, cannot constitute that place the seat of control and
management of the affairs of the family. Now we are inclined in the Circumstances of the present case to
attach much importance to the fact that the assessee had to stay in British India for 101 days in a
particular year. He was undoubtedly interested in the litigation with regards to his family property as well
as in income-tax proceeding and by merely coming out of India to take part in them he cannot be said to
have shifted the seat of management and control of the affairs of his family or to have started second
centre for such control and management. The same remark must apply to the starting of two partnership
businesses, as mere "activity" cannot be the test of residence".
If karta permanently lives in Ceylon and the mere fact that he has a house in India where his mother lives,
cannot constitute that place the seat of power. If he comes to India for family litigation, there se ne shift
of se of power or there is no second centre. However, the assessee was unable to adduce evidence to show
that the control was wholly outside India. Therefore, the presumption that normally a Hindu undivided
family will be taken to be resident in taxable territory was held to be the legitimate conclusion.
CASE STUDY
Question. P, a Hindu Undivided Family of which X was the Karta and Y, Z and W were the other
coparceners, carried on business in cloth in Singapore. Y came to Delhi in 2013 and started a cloth
business in partnership with some other person. Y alone was the financing partner in this firm and the
money that he paid to the firm belonged to the family. Subsequently, Z also joined the firm as a partner.
Later on, another business was started in Bombay on partnership basis and the partners there were the
partners of the Delhi firm, W and an outsider. Can the family be held to be resident an India in the
previous year 1994 on the grounds that some of its coparceners are partners in the firms and that those are
financed by the family funds? Give reasons.
Brief Answer. The present problem is based on the case-C.I.T. v. Nandlal Gandalal, (1960) 40 ITR
I(SC). In that case the Supreme Court The held that (a) if a coparcener is a partner in a firm, then he is so
in his individual capacity and (b) partnership of a coparcener does not make the control and management
of affairs of family situated in India.
In that case the assessee was a member of a Hindu undivided family which resided in Kathiawar which at
the relevant time was outside the British India and consequently not subject to the operation or
application of Income-tax Act, 1922. The assessee borrowed a sum of Rs. 1,50,000/- from his father and
started a partnership business in Bombay with two other persons.
Similarly, the same partnership started a firm in Benaras where one of the brothers of the assessee joined.
The question arose whether the income received by the assessee as a partner in the firm was the income
of the Hindu undivided family or the assessee could be said to reside within the taxable territories. The
relevant assessment year was 1945-46.
The Supreme court by majority held that the Hindu undivided family was not resident within the taxable
territories at the relevant time. It was observed that the partnership was not between the family and other
partners even though the coparcener was; it was between the coparcener individually and his other
partners. On the death of the coparcener the surviving members of the family cannot claim to continue as
partners nor can the stranger partners sue the surviving members for the loss.
Therefore, under the partnership law and under the Hindu law, the control and management were in the
hands of the individual coparcener who was the partner and not the family. The existence of such a
partnership will not determine the residence of the family within the meaning of Section 4A(b) of the
Income-tax Act, 1922.
Therefore, in the present problem the Hindu undivided family cannot be held to be resident in India in the
previous year 2015 on the grounds that some of its coparceners are partners in the firms and those are
financed by the family funds.
# For determining whether HUF is a resident or not the residential in the previous year is not relevant, but
for determining whether the HUF it ordinary resident in India, Karta’s residential status in previous year
becomes relevant
RESIDENTIAL STATUS OF FIRMS, ASSOCIATION OF PERSON, BODY OF INDIVIDUALS
AND OTHER PERSON EXCEPT COMPANIES [SECTION 6(4)]
The same control and management test is applicable.
Except individuals and HUF all other persons are classified into residents and non residents and further
classification into ROR or NOR is not required
The residential status of partners in a firm is immaterial, except in cases where the residential status
affects the control and management.
RESIDENTIAL STATUS OF COMPANIES [SECTION 6(3)]
A company said to be a resident in India if (a) it is an Indian company, (b) its place of effective
management in that year, is in India(for foreign cos)
POEM (place of effective management) Test- POEM means a place where the key managerial and
commercial decisions that are necessary for the conduct of business of an entity as a whole are in the
substance made.
If the turnover is more than 50 crores a year, then poem test applies.
Circular 6/17 of CBDT provides guiding principles of determination of a poem of a company.
Poem in case of company engaged in active business outside India shall be assumed to be outside India, if
the majority of the meetings of the board of directors are held outside India
Circular 8/17 of CBDT says that poem provisions shall not apply to company having turnover or gross
receipts less than or equal to 50 CRORES in a financial year
#A company with active business outside India
1. Passive income is not more than 50% of the total income,
2. less than 50% of the assets are situated in India.
3. Less than 50% of the employees are in India or are resident in India.
4. Less than 50% of the total payroll expenditure is used on these employees
TAX TREATMENT TO SALARY, PERQUISITES ETC
 SALARY
Salary is any remuneration paid by the employer to the employee for his or her services
Under income tax act, there are two main ingredients of salary, one being the remuneration, that is the
monitory compensation and the second being the relationship of the employer employee.
An income can be taxed under the head "Salaries" only if there is a relationship of an employer and
employee between the payer and the payee. If this relationship does not exist, then the income would not
be deemed to be income from salary. The relation of employer and employee should be of master and
servant. A master is one who not only directs what and when a thing is to be done but how it is to be
done, and the servant is one who is bound to carry out the instruction given to him by such masters.
For example, in the case of a lecturer of a college who is also appointed vice-principal of the college and
gets vice- principal allowance, the allowance would be taxed under the head "Salaries" because it is being
received from the employer by the employee although for non-academic work.
However, if this lecturer sets the Question Paper of a university, the remuneration which he receives for
setting the paper will not be taxable under the head "Salaries" as the university is not the employer of the
lecturer. Such remuneration would, however, be taxable under the head "Income from other sources".
A Member of Parliament or State Legislature is not a Government employee and therefore, remuneration
received by him is not taxable as salary income, but as income from other sources. However, salary
received by the Minister in the Government is taxable under the head salary.
Any salary, bonus, commission or remuneration due to received by an assessee from a firm, in which he
is a partner, shall not be taxable under the head "Salaries' as there is no employer-employee relationship.
It will, however, be taxable under the head Profits and gains of business or profession'.
Any partner of any firm drawing any wages or remuneration from such firm will not be considered as
salary. Rather, income from business or profession
In Dharangadhra Chemical Works Ltd. v. State of Maharashtra, AIR 1956 SC 264 the Supreme Court
held that the test to determine employer-employee relationship is whether having regard to the nature of
work employer has due control and supervision or control and supervision in some reasonable sense not
only on what is to be done but also on how it is to be done. The nature or extent of control which is
requisite to establish the relationship of employer and employee must necessarily vary from business to
business and is by its very nature incapable of precise definition. It is question of fact in each case.
In Ram Prasad v. C.I.T., (1972) 86 ITR 112 (SC) the Supreme Court made the following observations
with regard to master-servant relationship in companies:
(a) The directors of a company are not servants but agents in as much as the company cannot act in its
own person but has only to act through directors.
(b) A managing director may have a dual capacity. He may both be a director as well as an
employee.
(c) Whether or not a managing director is a servant of the company a part from being a director can
be determined by the articles of association of the company and the terms of his employment.
(d) The test for determining whether the managing director is a servant or agent is solely dependent
on the extent of supervision and control exercised on him. The real question is one of construction
of the articles of association and the relevant agreement which is entered into between the
 company and the managing director. If the company is itself carrying on the business and the
managing director is employed to manage its affairs in terms of its articles and under the
agreement he could be dismissed if his work is not satisfactory, then he is a servant of the
company.
Place of Accrual [Section 9(1)]- The golden rule is that salary will be deemed to accrue or arise at a
place where services are rendered. If the services are rendered in India and salary on account of such
services are received outside India, it will be treated as an income which is deemed to accrue or arise in
India. Similarly, if a person, who after rendering services in India, retires and settles abroad, receives any
pension on account of the same, such pension shall be an income which is deemed to accrue or arise in
India as the services on account of which pension accrues, were rendered in India.
However, there is one exception to the above rule. In case of a citizen of India who is a Government
employee and renders any service outside India, salary received by him would be treated as income
deemed to accrue or arise in India although the services are rendered outside India. But as per section
10(7), in case of such Government employees, who are citizens of India, any perquisite or allowances
received outside India shall, however, be exempt.
Surrender of Salary- Any salary surrendered by the employee to the Central Government, under the
Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, will not be included while
computing his taxable income, whether he is a private sector public sector or Government employee.
Foregoing of Salary- Once salary has been earned by an employee, it becomes taxable in his hands
though he may subsequently waive the right to receive the same from the employer. The waiver of salary
by the employee would be treated as application of the income and salary though waived would be
taxable in his hands.
BASIS OF CHARGE- SECTION 15
Following income shall be chargable to income tax under the head of salaries:
a. Any salary due from an employer or a former employer to an assessee in the previous year,
whether paid in that previous year or not; [SALARY DUE IN SAME YEAR]
b. Any salary paid or allowed to him in the previous year by or on behalf of an employer or a
former employer, though not due in that previous year or before it became due to him;
[ADVANCED SALARY]
c. Any arrears of a salary paid or allowed to him in the previous year, buy or on behalf of an
employer or a former employer, if not charged to income tax in any earlier previous year
[ARREARS OF PREVIOUS YEAR]
Where any salary paid in advance is included in the total income of any person for any previous year, it
shall not be included again in the total income of the person when the salary becomes due.
The expression “paid” includes every receipt by the employee from the employer whether it was due to
him or not. The expression “allowed” is of wider connotation and any credit to the employee's account is
covered, thereby and should imply that right is conferred on the employee in respect of the same. [CIT v
Russel (L. W.) (1964) 53 ITR (SC)].
If the salary is payable on monthly basis, it normally becomes due at the end of the month. In this case, it
will be taxable on 'due' basis because 'due' is earlier than 'receipt'. Therefore, salary is normally taxable
from April to March as the salary of March becomes due at the end of the month. However, in some cases
the salary becomes due on the 1st day of the next month. In that case we shall tax the salary from March
to February because salary of month of March of current year will be due only in the next financial year
and the salary of month of March of last previous year became due only on 1st April of the current year.
Although salary is taxable on 'due' or 'receipt' basis whichever is earlier, but if there are any arrears of
salary which have not been taxed in the past, such arrears will be taxed in the year in which these arrears
are paid or allowed to the employee. For example, if the government announces increase in dearness
allowance in the previous year 2023-24 which is effective from 1.1.2016 then arrears from 1.1.2016 to
31.3.2023 were never due earlier. This means employees will receive arrears for the period between
January 1, 2016, and March 31, 2023. Since these arrears were never due earlier, they weren’t taxable
before. Now, when they are finally paid, the entire amount will be taxed in the year of payment, even
though it covers several past years.
MEANING OF SALARY- SEC-17
Section 17(1) gives an inclusive definition of 'Salary'
Salary includes-
(i) wages; - no conceptual difference between wages and salary.
(ii) any annuity or pension; - annual grant paid by the employer either voluntarily or on account of
contractual agreement.
(iii) any gratuity; - Payment made by the employer to the employee in appreciation of the past
services rendered by the employee
(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;-
*perquisites and * profits in lieu of salary (when annuity is received by the present employer,
it is taxable a salary. But if it is received by the former employee, employer, then it is taxed as
profits in lieu of salary)
(v) any advance of salary;
(vi) any payment received by an employee in respect of any period of leave not availed by him;
(vii) Employer's contribution to Recognized Provident Fund (RPF) in excess of 12% of employee's
salary and interest credited to recognized provident fund in excess of 9.5% p.a;
TREATMENT OF VARIOUS INCOMES TO BE TREATED AS GROSS INCOME
RETIREMENT BENEFITS
1. Gratuity- Gratuity is a payment made by the employer to an employee in appreciation of the past
services rendered by the employee. Gratuity can either be received by:
a. the employee himself at the time of his retirement, or (taxable under the head of salary)
b. the legal heir on the event of the death of the employee. (taxable under the head of income
earned from other sources )
However, in both the cases, according to section 10(10) taxable gratuity is exempt up to certain limits.
Therefore, in case, gratuity is received by employees, salary would include only that part of tragedy,
which is not exempt under section 10(10).
For the purpose of exemption of Gratuity under section 10(10) the employees are divided into three
categories.
 Government employees and employees of local authorities- [Section 10(10)(i)]:
In the case of such employees, the entire amount of death-cum-retirement gratuity received exempt from
tax under section 10(10)(i). Nothing will, therefore be taxable under the head 'salaries' or Income from
other sources, as the case may be on account of gratuity
 Employees covered under Payment of Gratuity Act 1972
Any gratuity received shall be exempt to the extent it does not exceed the amount calculated in
accordance with the provisions of the Payment of Gratuity Act, 1972.
As per section 4(1) of the Act gratuity shall be payable to an employee on the termination of his
employment after he has rendered continuous service for not less than 5 years-
(a) on his superannuation, or
 (b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease.
However, the completion of continuous service of 5 years shall not be necessary where the termination of
the employment of any employee is due to death or disablement.
As per the Act, the minimum of the following amounts is exempt from tax:
(a) The amount of gratuity actually received.
(b) 15 days salary for every completed year of service or part thereof in excess of six months.
However in the case of an employee who is employed in a seasonal establishment and is not so
employed throughout the year, the exemption shall be for seven days wages for each season.
(c) Rs.20,00,000.
Gratuity receivable/received in excess of the minimum of the above amounts will be included in the gross
salary. For purpose of calculating completed year of service, more than 6 months shall be taken as a
completed year. A period of 6 months or less than 6 months shall be ignored.
In case of a seasonal workman, when gratuity at the rate of 7 days wages for each season requires to be
worked out. then one has to see the number of seasons in each completed year of service of the workman.
[Aspinwall and Co. v Lalitha Padugady AIR 1996 SC 580].
In the case of monthly rated employees for calculating 15 days' salary, the number of days in a month will
be taken as 26 working days. Therefore, the monthly salary shall be divided by 26 and multiplied by 15.
For example, if the monthly salary of an employee at the time of retirement is 22,600; 15 days salary
would be 21,500 (22,600 divided by 26 multiplied by 15).
In the case of piece rated employees, for calculating 15 days salary, daily wages shall be computed on the
average of the total wages received by him for a period of 3 months immediately preceding the
termination of employment the wages paid for any over time work shall not be included. and
For employees in seasonal establishment, 7 days wages (instead of 15 days) shall be taken and it will be
multiplied by number of seasons (instead of number of completed years) for which employed
 other employees [Section 10(10)(iii)] :
In the case of any other employee, gratuity received by him, on his retirement or on his becoming
incapacitated prior to such retirement or on termination of his employment or by legal heirs on his death,
shall be exempt to the extent of the minimum of the following amounts:
(a) Actual amount of gratuity received.
(b) Half month's average salary for every completed year of service.
(c) ₹20,00,000
*Average salary is to be calculated on the basis of the average of the salary for 10 months immediately
preceding the month in which such event occurs. For example, if an employee retires on 2.1.2024, the
average salary shall be taken as the aggregate of salary for the period from 1.3.2023 to 31.12.2023
divided by 10.
*Completed years of service- In calculating the number of years of service only completed years are to be
considered and part of the year whether more or less than 6 months, will be ignored. For example, if a
person retires after serving for 24 years and 11 months, the period of service will be taken as 24 years
only
2. Pension [S.17(1)(ii)]-
Pension is a payment made by the employer after the retirement/death of the employee as a reward for
past service.
Pension is normally paid as a periodical payment on monthly basis but certain employers may also allow
an employee to forgo a portion of the pension and receive a lump sum amount by surrendering such
portion of pension. This is known as commutation of pension. The pension may be fully or partly
commuted i.e. in lieu of the pension, a lump sum payment is made to the employee. The treatment of
these two kinds of pension is as under:
- Uncommuted pension i.e. the periodical pension: It is fully taxable in the hands of all employees,
whether government or non-government.

- Commuted pension:
Exemption in the case of Government employees or employees of local authorities or statutory
corporation [Section 10(10A)(i)]- Commuted pension received by these employees under their specific
service rules is wholly exempt under section 10(10A)(i). Hence nothing is included in the gross salary
under section 17(1). Normally, as per government rules full pension cannot be commuted. Exemption
shall be to the extent it is allowed to be commuted and the balance uncommuted pension received
periodically will be fully taxable.
Exemption in the case of other employees [Section 10(10A)(ii)]:- Commuted value of pension received by
any employee under any scheme of any other employer is exempt under section 10(10A)(ii) to the
following extent:
(a) where the employee receives gratuity also: The commuted value of 1/3rd of the pension, which he
is normally entitled to receive, is exempt from tax. Any amount received over and above the
exempted pension is taxable and hence included in gross salary.
(b) Where the employee does not receive any gratuity: The commuted value of half of the pension,
which he is normally entitled to receive, is exempt from tax. Any amount received in excess of the
exempt amount would be taxable.
In the above two cases, such commuted value is determined having regard to the age of the
recipient, the state of his health, the rate of interest and officially recognized tables of mortality.

3. Retrenchment Compensation [Section 10(10B)]

Any compensation received by a workman at the time of his retrenchment, under the Industrial
Disputes Act, 1947 or under:
(a) any other Act or rules or any order or notification issued there under; or
(b) any standing order; or
(c) any award, contract of service or otherwise,
shall be exempt to the extent of minimum of the following limits:
(i) Actual amount received;
(ii) 15 days' average pay for every completed year of service or part thereof in excess of 6 months;
(iii) Amount specified by the Central Government, i.e. ₹5,00,000.
Compensation received in excess of the aforesaid limit is taxable and would, therefore, form part of Gross
Salary.
4. Compensation received on Voluntary Retirement [Section 10(10C)]
Compensation received at the time of voluntary retirement in accordance with the service rules only that
amount will be available for exemption.
The exemption is the actual amount of compensation received or Rs. 5lakhs, whichever is less.
5. Leave Encashment
Employees are entitled to various types of leave while they are in service. The leave may either be availed
by them or in case these are not availed of, these may either lapse or these are allowed to be encashed
every year or these are accumulated and encashed after retirement or death
E.g. An employee is entitled to 60 days leave in a year, but he avails of only 20 days leave during the
year. Depending upon the rules of the company, he may be entitled to get the leave of 40 days encashed,
but in most cases the employee is entitled to accumulate his unavailed leave and encashment of such
accumulated leave is done only at the time of his retirement/resignation or death.

The treatment of the leave encashment is as under:

Encashment of leave during tenure of service: Leave encashment to an employee, while he continues to
be in service with the same employer, is fully taxable. In this case, however, the assessee can claim relief
under section 89.
Encashment of accumulated leave at the time of retirement [Section 10(10AA)]: For the purpose of
exemption of accumulated leave encashment, employees are divided into two categories:
(i) Government Employees (which means Central and State Government Employees only)
[Section 10(10AA)(i)]: Leave encashment of accumulated leave at the time of retirement,
whether on superannuation or otherwise, received by a Government employee, is fully exempt
from tax. Since full leave encashment is exempt, nothing is to be included in gross salary.

(ii) Other Employees [Section 10(10AA)(ii)): Leave encashment of accumulated leave at the time
of retirement whether on superannuation or otherwise received by other employees (including
employees of local authority and public sector undertakings) is exempt to the extent of the
minimum of the following four amounts:

a) Leave encashment actually received;

b) 10 months' 'average salary';
c) Cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave
for every year of actual service rendered to the employer from whose service he has
retired. The cash equivalent is to be calculated on the basis of the average salary,
d) Amount specified by the Government i.e. ₹25,00,000 w.e.f. 1-4-2023:
PROVIDENT FUND
Provident Fund Scheme is a welfare scheme for the benefit of the employees. Under this scheme, certain
sum is deducted by the employer from the employee's salary as his contribution to the Provident Fund
every month. The employer also contributes a certain percentage of the salary of the employee to the
provident fund.
These contributions are deposited/ invested. The interest earned on these investments is also credited to
the provident fund account of the employees.
The balance thus keeps accumulating year after year. At the time of retirement/resignation, the
accumulated amount is given to the employee, if certain conditions are satisfied. In this regard it is
pertinent to note the following facts:
a. the contribution made by the employees is out of their income and therefore, there is no question
of taxing any contribution made by the employees because the entire amount of the income has
already been taxed. In fact, in such cases he is given a deduction from his gross total income on
account of the amount contributed by him.
 b. the contribution made by the employer is over and above the salary of the employee and is
therefore, an income deemed to be received by the employee though it is not immediately made
available to him. However, it is exempt upto certain limits.
c. the interest credited to the provident fund account of the employee is also an income of the
employee over and above his salary income. However, it is also exempt upto certain limits.
Types:
1. Statutory PF- set up under PF Act 1925
2. Recognized PF- set up under Employees PF and Miscellaneous Provisions Act 1952. applies to all
establishments employing 20 or more employees.
3. Unrecognised PF
4. Public PF- set up under Public PF Act 1968 and any member of public whether in employment or
not. No employer contribution to this fund

Public
Statutory Recognized Unrecognized
Criteria Provident
Provident Fund Provident Fund Provident Fund
Fund

Not Exempt from

Employer’s Exempt up to 12% of
Exempt from tax tax but also not NA
contribution Gross salary
taxable every year.

Employee’s
contribution eligible
for deduction u/s Yes Yes No Yes
80C (Reduction
Limit- 1.5L)

Not Exempt from

Exempt up to 9.5% Exempt
Interest Exempt from tax tax but also not
p.a. from tax
taxable every year.

Repayment of If certain conditions If certain conditions

Lumpsum amount are satisfied, then are satisfied, then
Exempt from tax Exempt
on retirement/ the lump sum the lump sum
u/s 10(11) from tax
resignation/ amount is exempt amount is exempt
termination from tax from tax

Conditions for RPF in last point are:

(i) If the employee has rendered continuous service with his employer for a period of 5 years or
more, or
(ii) If, though he has not rendered such continuous service of 5 years, the service has been terminated
(a) by reasons of such employee's ill health or (b) by the contraction or discontinuance of the
employer's business or (c) or other cause beyond the control of the employee, or
(iii) If, on the cessation of his employment, the employee obtains employment with any other
employer, to the extent the accumulated balance due and becoming payable to him is transferred
to his individual account in any recognized fund maintained by such other employer.
However in a situation mentioned under clause (iii) above for calculating period of service for clause (1)
and (ii) above the period or periods for which such employee rendered continuous service under his
former employer or employers aforesaid shall also be included.
*Employers contribution and interest on provident fund in the case of unrecognized provident fund are
not taxable in the year of contribution or credit of interest. However when the lump sum amount is
received by the employee then it becomes taxable.
* If an employee who participates in a recognized provident fund receives their accumulated balance in
situations not covered by the usual conditions—for example, if they resign voluntarily before completing
five years of service with their employer—then the amount received becomes subject to tax. In such
cases, the employee must pay an additional amount equal to the difference between the total tax they
would have owed if certain tax concessions on recognized provident fund contributions had not been
provided, and the actual tax they paid in those years of contribution. This effectively means any tax relief
or deduction previously granted will be reversed. Additionally, the entire employer's contribution, along
with the interest on it—which was previously untaxed—will be taxed as "profit in lieu of salary." The
employee, however, may seek tax relief under Section 89 in this matter. Furthermore, any interest earned
on the employee's own contributions will be taxed as "income from other sources." [CIT v Hyatt (G.)
(1971) 80 ITR 177 (SC)]
ALLOWANCES
Allowance is a fixed monetary amount paid by the employer to the employee for meeting some particular
expenses, whether personal or for the performance of his duties. These allowances are generally taxable
and are to be included in the gross salary unless a specific exemption has been provided in respect of any
such allowance.
Specific exemptions in respect of allowances are provided under the following sections:
(i) House Rent Allowance Section 10(13A)
(ii) Prescribed special allowances - Section 10(14)
The above allowances shall be exempt either in full or upto a certain limit and the balance, if any, shall be
taxable and thus included in gross salary.
 House Rent Allowance Section 10(13A)
House Rent Allowance is given by the employer to the employee to meet the expenses in connection with
rent of the accommodation which the employee might have to take. HRA is taxable under the head
'Salaries' to the extent it is not exempt under section 10(13A). HRA is exempt under section 10(13A) to
the extent of the minimum of the following three amounts:
(a) Actual House Rent Allowance received by the employee in respect of the relevant period.
(b) Excess of rent paid for the accommodation occupied by him over 10% of the salary for the
'relevant period".
(c) 50% of the salary where the residential house is situated at Mumbai, Kolkata, Delhi or Chennai
and 40% for other cities.
Gestetner Duplicators Pvt. Ltd v CIT (1979) 117 ITR 1 (SC) - Salary for this purpose includes dearness
allowance if the terms of employment so provide but exclude all other allowances and perquisites. Thus
dearness allowance will be included to the extent it is part of salary as per terms of employment. All other
allowances and perquisites will not be included. However, as per the Supreme Court decision,
commission, if received as a fixed percentage of turnover achieved by employee, would form part of the
salary.
 Prescribed special allowances - Section 10(14)
Prescribed allowances which are exempt under section 10(14) are of the following two types:
 (i) Special allowances for performance of official duties . These allowances are not in the nature
of a perquisite within the meaning of section 17(2) and are specifically granted to meet
expenses wholly, necessarily and exclusively incurred in the performance of duties of an
office or employment of profit. These allowances will be exempt the extent such expenses are
actually incurred for that purpose. [Section 10(14)(i)].
(ii) Allowances to meet personal expenses: These allowances are granted to the employee to meet
his personal expenses either at the place where the duties of his office or employment of profit
are ordinarily performed by him or at the place where he ordinarily resides. These allowances
are exempt to the extent prescribed. [Section 10(14)(ii)]
- Children Allowance: exempt upto actual amount received or upto 100rs p.m. for max 2 children
whichever is less
- Hostel Expenditure Allowance: exempt upto actual amount received per child or upto 300rs
p.m. for max 2 children whichever is less
PERQUISITES
A perquisite is defined in the Oxford English Dictionary as any casual emolument, fee, or profit, attached
to an office or position in addition to the salary or wages. In simple words, perquisites are the benefits in
addition to normal salary to which the employee has a right by virtue of his employment.
Thus, 'perquisites' are the benefits or amenities in cash or in kind, or in money or moneys worth and also
amenities which are not convertible into money, provided by the employer to the employee whether free
of cost or at a concessional rate. Their value, to the extent go to reduce the expenditure that the employee
normally would have otherwise incurred in obtaining these benefits and amenities, is regarded as part of
the taxable salary.
The essential feature of a perquisite is that an employee should have a right to the same and that it should
not be a mere voluntary or contingent payment.
Definition of ' Perquisite' as per section 17(2)
Section 17(2) of the Income-tax Act, 1961 provides a broad definition of "perquisites" and includes the
following:
(i) The value of rent-free accommodation provided to an employee by their employer.
(ii) The value of any rent concession for accommodation provided to an employee by their employer.
(iii) The value of any benefit or facility provided free of cost or at a reduced rate in these cases:
a. by a company to an employee who is a director of the company,
b. by a company to an employee who has a substantial interest in the company,
c. by any employer to an employee not covered under (a) or (b) with a salary (excluding the value
of non-monetary benefits) over ₹50,000. These employees are termed "specified employees."
(iv) Any amount the employer pays to settle an obligation that the employee would have otherwise paid.
(v) Any payment by the employer, directly or indirectly, or through a fund (excluding recognized
provident funds, approved superannuation funds, or deposit-linked insurance funds) to insure the
employee’s life or secure an annuity.
(vi) The value of any specified security or sweat equity shares transferred to the employee, directly or
indirectly, by the employer or a former employer at no cost or at a concessional rate.
(vii) The total of any contributions made by the employer to the employee's account in:
a. a recognized provident fund,
b. the scheme under section 80CCD(1), and
c. an approved superannuation fund,
in excess of ₹7,50,000 in a given year.
(vii a) The annual earnings (interest, dividends, or similar returns) on the balance in the employee's
account from employer contributions under section 17(2)(vii) above, provided that the employer's
contributions were previously counted as a perquisite.
(viii) The value of any additional fringe benefits or amenities as may be prescribed.

CATEGORIES OF PERQUISITES
 Taxable in hands of all categories of Employees
#Rent free accommodation or accommodation provided at concessional rate- It is an arrangement for
residence allotted to an employee against zero or minimal rent.
Accommodation provided to the employee may be
(1) unfurnished
(2) furnished
Further, such accommodation may be provided:
(a) rent free, or
(b) at concessional rate.
METHOD OF VALUATION
ACCOMODATION UNFURNISHED FURNISHED
PROVIDED BY:
Govt to Employees If accommodation is rent free: To be treated as the same value
value shall be license fee in unfurnished. The value will
determined by the CG/SG. however be increased by 10% pa
of cost of furniture or if such
If accommodation is at furniture is hired from 3rd party
concessional rate: License fee then actual hire charges payble
be reduced by rent actually paid for the same.
by the employee.
Any Other Employer where Population not exceeding 15L- To be treated as the same value
accommodation is owned by the 5% of salary in unfurnished. The value will
employer however be increased by 10% pa
Population exceeding 15L but of cost of furniture or if such
not 40L- furniture is hired from 3rd party
7.5% of salary then actual hire charges payble
for the same.
Population exceeding 40L-
10% of salary
Any Other Employer where Actual rent charges paid by the To be treated as the same value
accommodation is taken on lease employer or 10% of the salary in unfurnished. The value will
or rent by the employer whichever is lower. (for all the however be increased by 10% pa
population numbers) of cost of furniture or if such
furniture is hired from 3rd party
then actual hire charges payble
for the same.

If accommodation is hotel then:

- stay is less than 15 days then not taxable
 - more than 15 days then minimum of following will be taxable:
a. 24% of salary
b. Actual charges paid by the employer to the hotel
Whichever is lower.
Exceptions to Rent Free Accommodation: -
Accommodation provided by the employer shall be a tax-free perquisite
1. If the place of stay is in a remote area.
2. Where on account of his transfer from one place to another, the employee is provided with
accommodation at the new place of posting while retaining the accommodation at the other place,
the value of perquisite shall be determined with reference to only one such accommodation which
has the lower value (as determined according to the above provisions) for a period not exceeding
90 days and thereafter the value of perquisite shall be charged for both such accommodations.
# Valuation of monetary obligation of the employee discharged by the employer- As stated earlier,
wherever any monetary obligation of the employee is discharged by the employer, which otherwise
would have been payable by the employee, it is considered as a perquisite and is taxable in the hands of
all employees. Few other examples of monetary obligation are given below
(a) gas, electricity bill paid or reimbursed;
(b) children education expenses paid or reimbursed;
(c) medical expenses reimbursed;
(d) income-tax or professional tax paid by employer;
#Valuation of Life Insurance premium/deferred annuity premium paid/payable by the employer- Any
sum payable by the employer, whether directly or through a fund other than a recognized provident fund
or an approved superannuation fund or Deposit Linked Insurance Fund
#Any other fringe benefits
 Taxable in Hands of Specified Employees
Defined in s. 17(2)(iii) It includes:
a. is a director of the company,
b. an employee who has a substantial interest in the company,
c. an employee not covered under (a) or (b) with a salary (excluding the value of non-monetary
benefits) over ₹50,000.
#Valuation of Motor Car/other vehicles [Rule 3(2)]
It is a perquisite only for specified employees because it is a facility provided by the employer to the
employees. On the other hand, if the car belongs to the employee and the expenses of running and
maintenance of that car are met by the employer, it becomes a perquisite taxable in the hands of all
employees as it is an obligation of the employee to maintain his car but such obligation is being met by
the employer.
The use of any vehicle provided by a company or an employer for journey by the assessee from his
residence to his office or other place of work, or from such office or place to his residence, shall not be
regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate. In other
words, such use shall not be treated as private or personal use of the employee.
# Provision by the employer of services of a sweeper, a a gardener, a watchman or personal attendant
[Rule 3(3)]
The total amount of salary paid or payable by the employer or any for such services as reduced by any
amount paid by the employee for such services
If the above servants are engaged by the employer and the facility of such servants are given to the
employees it will be a perquisite for specified employees only. On the other hand, if these servants are
employed by the employee and wages of such servants are paid or reimbursed by the employer, it will be
a perquisite for all categories of employees. However, in both the cases the valuation of perquisites shall
be done in the same manner as discussed above.
#Value of benefit to the employee resulting from the supply of gas, electric energy or water for household
consumption [Rule 3(4)]
# Value of any specified security or sweat equity shares
Any specified security or sweat equity shares that an employer or former employer allocates or transfers
to an employee, either for free or at a discounted rate, will be treated as a taxable perquisite for that
employee.
The taxable value of these specified securities or sweat equity shares will be calculated as their fair
market value on the date the employee exercises the option to acquire them, minus any amount that the
employee has actually paid or that has been deducted from them for these securities or shares.
 Tax-free Perquisites (for all employees)

 Medical facility. The value of any medical treatment provided to an employee or any
member of his family in hospital, dispensary or a nursing home maintained by the
employer shall be a tax-free perquisite.
 Recreational facilities: Any recreational facility provided to a group of employees (not
being restricted to a select few employees) by the employer is not taxable.
 Training of employees: Any expenditure incurred by the employer, for providing training to
the employees or by way of payment of fees of refresher courses attended by the
employees.
 Use of health club, sports and similar facilities provided uniformly to all employees by the
employer.
 The premium paid by the employer on an accident policy taken out by it in respect of the
employee would not be a perquisite. [CIT v Lala Shri Dhar (1972) 84 ITR 192 (Del) and
CIT v Vinay Bharat Ram (1981) 129 ITR 128 (Del)].
 Food and beverages provided to employees: The following shall be a tax free perquisite in
the hands of the employees-
(i) free food and non-alcoholic beverages provided by the employer to his employees
during working hours:
(a) at office or business premises or
(b) through paid vouchers which are not transferable and usable only at eating
joints.
Provided the value of such meal is upto 50 per meal
(ii) Any tea or snacks provided during working hours
 Educational facility for children of the employee: Where the educational institution itself
is maintained and owned by the employer and free educational facilities are provided to
the children of the employee or where such free educational facilities are provided in any
institution by reason of his being in employment of that employer, there shall be no
perquisite value if the cost of such education or the value of such benefit per child does
not exceed ₹1,000 p.m.
 Leave Travel Concession [S.10(5)]
The employer is entitled to exemption in respect of the value of travel concession or assistance received
by or due to him from his employer or former employer for himself and his family, in connection with his
proceeding-
 (a) on leave to any place in India.
(b) to any place in India after retirement from service or after the termination of his service.
The exemption shall be allowed subject to the following:
(1) where journey is performed by air - Maximum exemption shall be an amount not exceeding the
air economy fare by the shortest route to the place of destination;
(2) where journey is performed by Railways - Maximum exemption shall be an amount not exceeding
the air-conditioned first class rail fare by the shortest route to the place of destination; and
(3) where journey is performed by roadways - The amount eligible for exemption shall be:
where a recognised public transport system exists, an amount not exceeding the 1st class or deluxe
class fare, as the case may be, on such transport by the shortest route to the place of destination;
and
How many times can exemption be claimed?
The assessee can claim exemption in respect of any two journeys in a block of 4 years. Eg: 2022-2025.
 Profits in lieu of salary [Section 17(3)
Section 17(3) gives an inclusive definition of "Profits in lieu of salary". As the name suggests, these
payments are received by the employee in lieu of or in addition to salary or wages. These payments
include the following:
(1) Terminal Compensation: The amount of any compensation due to or received by an assessee from his
employer or former employer at or in connection with the termination of his employment or the
modification of the terms and conditions relating thereto is regarded as profits in lieu of salary. The
termination may be due to retirement, premature termination, resignation or otherwise.
(2) Payment from an unrecognised provident fund or an unrecognized superannuation fund: The payment
due to or received by an assessee from an unrecognised provident fund or an unrecognised
superannuation fund to the extent to which such payment does not consist of contributions by the
employee or interest on such employee's contribution.
(3) Payment under Keyman Insurance Policy: Any payment due to or received by an employee, under a
Keyman Insurance Policy including the sum allocated by way of bonus on such policy, will also be
regarded as profit in lieu of salary.
(4) Any amount due or received before joining or after cessation of employment: Any amounts due to or
received, whether in lump sum or otherwise by any assessee from any person-
(A) before his joining any employment with that person; or
(B) after cessation of his employment with that person.
(5) Any other sum received by the employee from the employer: All other payments made by an
employer to an employee, would be brought under the head "Profits in lieu of salary". This is a
comprehensive provision by virtue of which all payments made by an employer to an employee whether
made in pursuance of a legal obligation or voluntarily are brought under profit in lieu of salary.
However, the following receipts, will not be termed as 'profits in lieu of salary' to the extent they are
exempt under section 10.
(1) Death-cum-retirement gratuity Section 10(10)
(2) Commuted value of pension-Section 10(10A)
(3) Retrenchment compensation received by a workman Section 10(10B)
(4) Payment received from a statutory provident fund Section 10(11)
(5) Payment received from recognised provident fund Section 10(12)
(6) Any payment from an approved superannuation fund as per section 10(13)
 (7) House rent allowance exempt under section 10(13A)
In short, except for the terminal and other payments specifically exempted under clauses (10) to (13A) of
section 10, all other payments received by an employee from an employer or former employer are liable
to tax under this head.