Chapter 4.

INCOME FROM SALARY

(Sec. 15 – Sec. 17)

SUMMARY OF SECTIONS

Sec. 15 – Basis of charge

Sec. 16 – Deduction allowed
Sec. 17(1) – Salary
Sec. 17(2) – Perquisites read with Rule 3
Sec. 17(3) – Profit in lieu of salary (Deemed salary).
Sec. 10 – Exempt.
Sec. 89 – Relief.

Concept 1: Sec.15 Basis of charge

Income is taxable under the head IFS only if there is an employer – employee relationship.
(Contact of service) between payer & payee.
Once this relationship is established then anything receive from employer is taxable as
Salary on “Due or Receipt basis” whichever is earlier.

Employer – Employee relationship

Situation Whether as IFS or Not ?

• Part time job IFS
• Salary of working partner from partnership PGBP
firm
• Salary of MP/MLA/MLC IFOS
• Income of college professor from College
o Salary from college IFS
o Examination fee from college IFS
o Examination fee from ICAI IFOS
• Salary forgone IFS
• Salary surrendered Exempt

Net Basic Salary

It is a salary after certain compulsory deductions. Various deductions shall be added back to the
Net Salary and the gross amount shall be chargeable to tax.

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❖ Concept 2 : Computation of income from salary

Particulars Amount Amount

1. Basic salary xxx

2. Dearness allowance/Dearness pay xxx
3. Advance salary xxx
(Advance against salary – Not taxable) xxx
4. Arrears of salary xxx
5. Commission/Incentives xxx
6. Bonus xxx
7. Employer contribution to PF xxx
8. Allowance xxx
Less : Exemptions u/s 10 xxx
9. Perquisites u/s 17(2) xxx
10. Gratuity xxx
11. Pension xxx
12. Leave encashment xxx
13. VRS compensation xxx
14. Retrenchment compensation xxx
GROSS SALARY XXX
Less : Deduction U/S 16
16(ia) Standard deduction (50000)
16(ii) Entertainment allowance (xxx)
16(iii) Professional tax/Employment tax (xxx) (xxx)
NET SALARY XXX

❖ Concept 3 : Year of tax

Grade of salary as on 01.01.2013 (Date of join)

20,000 – 1,000 – 25,000 – 2,000 – 40,000
e.g. 1 :
01.01.2013 = 20,000 pm
01.01.2014 = 21,000 pm
01.01.2015 = 22,000 pm
01.01.2016 = 23,000 pm
01.01.2017 = 24,000 pm
01.01.2018 = 25,000 pm
01.01.2019 = 27,000 pm
01.01.2020 = 29,000 pm
01.01.2021 = 31,000 pm

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BY CA RAM PATIL
 ➢ Salary become Due on Last Day (Generally)
➢ Taxable period = April 2020 – March 2021

01.04.2020 (29,000 * 9 months) 01.01.2021 (31,000 * 3) 31.03.2021

= 2,61,000 + 93,000
= 3,54,000

➢ Exceptionally, Salary becomes Due on first Day of each month.

01.04.2020 (29,000 * 10 months) 01.01.2021 (31,000 * 2) 31.03.2021

= 2,90,000 + 62,000
= 3,52,000

Concept 4 Advance Salary Taxable On Due or Receipt basis (Whichever is earlier).

Concept 5 Arrears Salary : It means salary under dispute or increase of salary retrospectively.

Taxable in the year of receipt subject to sec. 89 relief

Concept 6 Commission

Fixed % base on turnover Other Commission

Turnover Commission Monthly Commission

Taxable Taxable

Concept 7 Bonus / Ex gratia Taxable On receipt basis

Concept 8 ALLOWANCES

Fixed monthly payment

Employer Employee
Monetary

For private / Official use

use

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Part A: Taxable Allowances:

• Dearness allowance
• Entertainment allowance
• House rent allowance
• Medical allowance
• Marriage allowance
• Family allowance
• City compensatory allowance
• Overtime allowance
• Project allowance, etc.

Note: Dearness allowance

D.A. as per terms Any other D.A.

Of Employment

D.A. forming part of D.A. not forming part of

Retirement Benefit Retirement Benefit

D.A(T) D.A (NT)

Taxable Taxable

Part B: Exempt Allowances:

(a) Exempt upto Income tax limit (Actual expenditure is Irrelevant)

Children education allowance = ₹ 100 p.m. p.c.

Children hostel allowance = ₹ 300 p.m. p.c.

Underground allowance(mines) =₹ 800 p.m.

Tribal area allowance = ₹ 200 p.m.

Transport allowance [H to O] = ₹ 3200 p.m. [HC/D/D/B]

Transport allowance to transport Sector employee = 70% of amount received or

Rs. 10,000 p.m. (whichever is Lower)

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# P.m.p.c; Per month per child
# HC/D/D/B : Handicapped, Deaf, Dumb, Blind

(b) Exempt upto Actual expenditure

C - Conveyance
U - Uniform
T – Travel/Tour
H – Helper
R - Research
D - Daily

(c) Fully Exempt allowances

• Allowance to UNO employee

• Allowance to UPSC member
• Foreign allowances to Govt. employees working outside India
• Sumptuary allowance given to High court/Supreme court Judges

Note 1

An employee, being an assessee, who opts for the provisions of section 115BAC would be entitled for
exemption only in respect of travelling allowance, daily allowance and conveyance allowance.

Note 2

An employee, being an assessee, who opts for the provisions of section 115BAC would be entitled for
exemption only in respect of transport allowance granted to an employee who is blind or deaf and
dumb or orthopedically handicapped with disability of the lower extremities of the body to the
extent of Rs. 3,200 p.m.

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Note: Entertainment Allowance

Step 1 : Taxable to all (Govt. / Non – govt employees)

Step 2 : Deduction U/S 16 (Only to Govt. employees)

1/5 * Basic Salary

Deduction Actual entertainment allowance received
Maximum ₹ 5,000 p.a. (Lower)

Note: House Rent Allowance (HRA)

HRA Received xxx

(a) 40% / 50% of Salary xx

Exemption u/s (b) HRA Received xx
10(13A) (c) Rent paid (-) 10% of Salary xx (xxx)
TAXABLE HRA XXX

# Salary = Basic salary + DA (T) + Turnover commission for Relevant period.

• 50% for Metro cities [Mumbai, Delhi, Chennai, Kolkata]
• 40% for Non – Metro cities.

# Relevant Period : Period for which Accommodation was actually occupied by Assessee.

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Concept 9: Retirement Benefits

I. Gratuity

Gratuity

Voluntary payment

Employer In appreciation of Employee

service rendered

During At Retirement
Employment

Fully Taxable Exempt u/s

10(10)

Exempt u/s 10(10)

Govt Employee POGA 1972 Any Other

Employee Employee
[Sec 10(10)(i)]
[Sec 10(10)(ii)] [Sec 10(10)(iii)]

Fully Exempt • 15/26 * Last month salary * • 1/2 * Avg salary p.m *
Rounded no. of year of service Completed no. of year of
• Actual Gratuity Received service
• Statutory Limit Rs. 20 Lacs • Actual Gratuity Received
• Statutory Limit Rs.20 Lacs

Whichever is Lower is Whichever is Lower is

Exempt Exempt

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Note 1 POGA 1972 Employees

# Salary = Basic salary + DA

# Rounded year of service = Rounded off only if fraction exceeds 6 months

Eg: 32 years 8 M = 33 years

32 years 4 M = 32 years
32 years 6 M = 32 years

Note 2 Any other employees

# Salary = Basic salary + DA + T/O commission for 10 months

# Average salary per month = salary of 10 months preceding the month of retirement
10

[ Excluding month of retirement]

# Ignore fraction year

# Where gratuity is received in any earlier from former employer and again received from another
employer in a later year, the limit of Rs. 20,00,000 will be reduced by the amount of gratuity exempt
Earlier.

Note 3 Taxable gratuity = Gratuity received – Gratuity exempted u/s 10(10).

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II. Pension
Pension

Uncommuted
Pension Commuted Pension

Fully Taxable to all Exempt u/s

employees 10(10A)

Govt Other Employee

Employee

Fully Exempt Gratuity Gratuity Not

Received Received

Exemption=1/3 of full amount Exemption=1/2 of full

of pension amount of pension

* Full amount of pension = Commuted pension

% of commuted pension

* Taxable commuted pension = Pension received – Pension exempted u/s 10(10A)

* Do not forget to take uncommuted pension after commutation

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III. Leave encashment
Leave Encashment

During Employment At Retirement

Fully Taxable to all Exempt u/s

10(10AA)
employees

Govt Employee Other Employee

Fully Exempt Whichever is Lower

is Exempt

• Leave credit in months * avg salary p.m

• 10M * Avg salary p.m
• Actual Leave Encashment Received
• Statutory Limit= Rs.3 Lacs

* Leave credit
Leave allowed xx
Max 30 days x completed of service
less: leave taken xx
Leave credit (in days) / 30 days xxx
30
Leave credit in months xx

# Average salary p/m = BS + DA (T) + T/0 for 10 months preceding the date of retirement
10

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III. Retrenchment compensation Sec. 10(10B)

1. Amount as per sec. 25 (F) of industrial dispute Act 1974.

2. Actual Retrenchment compensation .
3. Statutory limit : 500,000
(Whichever is Lower)

IV. Voluntary Retirement Compensation Sec 10(10C)

i.(a) Salary p.m x 3 months x No. of years of completion of services [ignore fraction]
i.(b) Salary p.m x No. of remaining months of service
ii. Actual compensation received
iii. Maximum Rs. 5,00,000

o Salary p.m = Basic + DA(T) + T/O commission

o Exemption can be under this section only once in a lifetime.

o Assessee can either claim exemption or relief but not both.

V. Provident Fund

Interest
Employee contribution SPF/RPF/URPF/P Employer Contribution
PF

Lumpsum Amount on withdrawal

PF = Employee contribution + Employer contribution + Interest contribution

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Tax Treatment of Provident Fund
Particulars SPF RPF URPF PPF SAF
Employee Sec 80C Sec 80C Sec 80C not Sec 80C Sec 80C available
Contribution available available available available
(Investment)
Employer’s Exempt Exempt upto Not taxable ---- Exempt upto Rs
Contribution 12% of salary - 7,50,000 [excess is
(Income) [BS+DS+TOC] taxable u/s 17(2)(vii)]
Interest Exempt Exempt upto Not taxable Exempt Note
9.5% pa
Lumpsum Exempt Exempt * Taxable* Exempt Exempt u/s 10(13)

*Exemption is available only if period of employment exceeds 5 years. Pre-matured withdrawal.

From RPF in ordinary situations is taxable and hence RPF shall deduct TDS u/s 192 A.

Note
The amount or aggregate of amounts of any contribution made -
o in a recognised provident fund
o in NPS referred to in section 80CCD(1)
o in an approved superannuation fund by the employer to the account of the assessee, to the
extent it exceeds Rs.7,50,000

Any annual accretion by way of interest, dividend or any other amount of similar nature shall be
treated as perquisites to the extent it relates to the contribution referred above (in excess of Rs.
7,50,000).

Withdrawal from UPRF

Employee Employer Interest on Interest on

Contribution Contribution Employee Contribution Employer
Contribution

Not an income Taxable as IFS Taxable as IFOS Taxable as IFS

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Has the employee rendered continuous
service of at least 5 years with the employer?

Yes No

Exempt Are his services terminated due to

(i) his ill-health (ii) contraction or
discontinuance of employer’s
business or (iii) any other cause
beyond the control of the
employee?

Yes No

Exempt
Is the entire balance T Is the entire balance
standing to the credit of a standing to the credit of
the employee x the employee
transferred to his No a No transferred to his NPS
individual account in any b account referred to in
RPF maintained with his l section 80CCD and
new employer? e notified by the Central
Government?

Yes
Yes

Exempt Exempt

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Concept 10: Perquisites

Employer Non Monetary Benefits Employee

(personal Nature)

Taxable value

Sec 17(2) read with Rule of Income tax Act 1962

TYPES OF PREQUISITIES

Taxable perquisites (19) Exempt perquisites

1. perquisites received by
HS/SC Judges
Taxable to all Employee Taxable to specified employees 2. Perquisites received by
Government employee outside
1. Accommodation 1. Domestic Servant Facility India
2. Life Insurance 2. Gas/water/Electricity 3. Perquisites received
3. Contribution to 3. Education Facility employee UNO
Superannuation Fund 4. Medical Facility 4. Perquisites received by
4. Interest free loan 5. Use of motorcar member of UPSC
5. Use of movable Assets 6. Leave travel concession. 5. Telephone Facility.
6. Transfer of movable Assets
7. Gift from employer
8. Credit card facility
9. Club facility
10. Free food
11. ESOP
12. Tour and travel
13. Obligation of employee
By employer

* Specified Employee
(i) Employee who is director
(ii) Employee who is a Substantial (20% or More) Shareholder
(iii) Employee whose net cash taxable salary > 50,000 p.a

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A. Perquisites Taxable to all Employees:
1. Accommodation

(a) Rent free unfurnished Accommodation (RF UFA)

Government Employee Other Employee

T/V/P = License fee

Owned by Employer Hired by Employer

Depends on population (2001) T/V/P = 1) 15% of l

Salary o
or w
Upto 10L 10L -25L Abv 25L 2) Hire e
charges r
T/V/P = 7.5 % of T/V/P = 10% T/V/P = 15%
Salary

(b) Rent free furnished Accommodation (RFFA)

Value of RFUFA xx
Add : value of furniture xx
T/V/P of RFFA xxx

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 Value of furniture

Owned by employer Hired by employer

T/V/P =10% p.a of original T/V/P = Hire charges

Cost ( ignore WDV )

(c) Concessional Accommodation (CA)

Value of RFFA / RFUFA xxx

Less : Amount recovered from employee (xxx)
T/V/P of CA xxx

(d) Hotel Accommodation

Upto 15 days Above 15 days T/V/P

T/V/P – Nil T/V/P = 24 % of salary

Or
Hotel charge

(e) Dual Accommodation

Upto 90 days After 90 days

T/V/P = House1 or House2 T/V/P = House1 + House2

* Salary

Includes Excludes

B = Basic Salary * DA ( NT)

D = Dearness Allowance (T) * Exempt allowance
A = Other Taxable Allowance * Employer contribution
B = Bonus to PF
C = Commission * Other Retirement
M = Other Monetary Benefits benefits.

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Salary for relevant period – the period for which accommodation was actually occupied by
Assessee.

Accommodation provided at project sites, mines, power plant etc. is official in nature.
Therefore, not taxable.

2. Life Insurance.
T/V/P = Premium Paid by employer.

# Medical or accidentally policy premium paid by employer is exempt (health care).

3. Employer Contribution to RPF/ Pension Fund u/s 80CCD(1)/ Superannuation Fund

T/V/P

Upto 7.5 L p.a. Above. 7.5 L p.a.

Exempt Excess taxable

4. Interest Free Loan

For treatment of specified diseases upto 20,000 Any Other Purpose

T/V/P = Nil T/V/P = Nil aggregate amt. loan > 20,000

TV/P = Max Monthly O/S Interest rate Interest charged

Balance as on last x of SBI on 1st - by the Employer x1
date of each month. day of Payment 12

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 4. Use of Movable Assets

Laptop/computer Any other Assets

TV/P – Nil
Owned by Employer Hired by Employer

TV/P = 10% of cost TV/P = Hire charge

(ignore WDV)

5. Transfer of movable Assets.

T/V/P = Original cost / or WDV – sale price

New Old
Particulars Lap/computer Motor car Other Assets
Original cost xxx xxx xxx
( - ) Depreciation for
each completed year 50% (WDV) 20% (WDV) 10% (SLM)
closing WDV
( - ) Amount received
from employee ( SP )
T/V/P XXX XXX XXX

Eg:- Employer transferred laptop for Rs. 2000 to employee

[ o.c = 100,000; period of use = 3 years / months ]

Original cost 100,000

(-) Depn y1 @ 50% 50,000
WDV 50,000
(-) Depn y2 @50% 25,000
WDV 25,000
(-) Depn y3 @50% 12,500
WDV 12,500
(-) Depn for 8 months -
WDV 12,500
(-) Selling price 2000
T/V/P 10500

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 7. Gift from Employer

Monetary Gift Non-Monetary Gift

TVP = cost to employees ( in kind/ voucher )

Upto 5000 Above 5000

T/V/P = Nil full amount

T/V/P = Will be
Taxable

8. Credit card / 9. Club facility

Wholly and exclusively Otherwise

Related to business

TVP = Nil TVP = cost to employer

10. Free food

Tea / Snacks During working hours Any other

Time

T/V/P = Nil T/V/P = Fully taxable

In office / Factory Premises Any other premises

T/V/P = Fully taxable

Upto 250 meal Above Rs. 50/meal

T/V/P = Nil T/V/P = excess taxable *

* Assume 30 working days .

T/V/P = cost of employer – ( 50 x 300 )

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 11. ESOP / ESOS / Sweat equity

T/V/P = [ Fair Market value – Issue price] x No. of shares

Note : cost of acquisition = FMV taken u/s 17( 2 ) in capital gain

Fair Market Value

Listed Securities Unlisted Securities

Value determined by
Exercise on Trading Day Exercise on non-trading Merchant Banker
Day

As on
Average Price Closing Price on
[(Op Price + Cl Price)/2] preceding previous
trading day Date of exercising of the option
Or
Earlier date but not earlier than
180 days from the date of the
exercising the option

Note
If shares are listed on more than one recognized stock exchange then the FMV on RSE
which records the highest volume of trading in the share.

Year of Tax
Tax on perquisite of specified securities and sweat equity shares is required to be paid in
the year of exercising of option.

However, where such shares or securities are allotted by the current employer, being
an eligible start-up referred to in section 80-IAC, the perquisite is taxable in the year
• after the expiry of 48 months from the end of the relevant assessment year
• in which sale of such security or share are made by the assessee
• in which the assessee ceases to be the employee of the employer
whichever is earlier

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 12. Tour and Travel

Official Nature Personal Nature Free travel ticket

T/V/P = Nil eg. Official tour with

Family or extended for Airline / Any other
Tour Railway employee sector employee

T/V/P = cost of T/V/P = Nil T/V/P =

Employer Fare charged
to other
Passenger

13. Obligation of Employee paid by Employer

T/V/P = cost to employer – amt. recovered by employer

B. Perquisites Taxable only to specified Employees.

1. Domestic Servant Facility

Servant provide by Employer

T/V/P = cost of the Employer

2. Gas/ water /Electricity Facility

Provided by outside agency Provided by the employer

T/V/P = Invoice amt (cost employer) eg : [ TATA power to

TATA Employee
TVP = Manufacturing Cost
p.u x unit consumed
By Employer

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 3. Education Facility

To children of To any other Family

To Employee
Employee Member

T/V/P= Nil In school Owned/ T/V/P= Cost to

In any other
Controlled by Employer
School
Employer

Cost upto Rs.1000 Cost > Rs.1000 p.m.

T/V/P= Cost to
p.m. p.c. p.c.
Employer

T/V/P= Nil T/V/P= Fully Taxable

4. Medical Facility

In India Outside India

In Employer’s Cost of Cost of Stay Cost of Travel

hospital/Govt. Any Other Treatment (P) (P+1A) (P+1A)
hospital/ Place
Recognized
Hospital Upto RBI Above RBI
Limit Limit GTI upto 2L GTI > 2L
T/V/P = Fully
T/V/P = Nil
Taxable
T/V/P T/V/P =
T/V/P = T/V/P = Fully
Cost to Employer
Nil Nil Taxable
– RBI Limit

GTI = Gross Total Income

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# Medical allowance = Fully Taxable
# Medical Insurance = Fully exempt

Employee
Spouse
Patient Children Parent
Dependent Brother
Sister

5. Leave travel concession

Exempt u/s 10(5)

1. Amt received from employer

Exemption = 2. Amt spend by employee
3. Income tax limit

*Income tax limit

Journey performed by Air By any other mode

Exempt : Air fare of economy

Class by shortest route . places are connected places are not
By railways Connected by
Railways
Exempt: AC 1st class
Rail fare

Recognised public Any other case

Transport exists ( deemed )

Exempt: fare of Deluxe Exempt: Rail fare

Class of AC 1st class for
Similar distance

# Journey must be performed in India.

# Exemption is for maximum 2 Journeys in the block of 4 calendar year.

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Relative
Employee
Spouse
Children max 2 c ( except )*
Dependent Parent
Brother
Sister

* Multiple birth taken after 1st child shall be considered as one

6. Motorcar

Exclusive for office use Exclusive for office use

OR
10% p.a original cost/hire change xxx
H O Running & Maintenance exp
( house ) ( office ) by employer xxx
Driver salary given by employer xxx
xxx
T/V/P = Nil Less : amt recovered from
Employee (xxx)
T/V/P xxx

Partly for office & partly for private use [ only one car ]

Car owned by employer Car owned by employee

Running and maintenance Running and maintenance

By employer By employee By employer By employee

T/V/P = 1800*/ T/V/P = 600*/900* p.m R & M exp T/V/P= Nil

2400* p.m paid by e’er
(-) std amt for
T/V/P = Office use
(1800*/ 2400* Pm)

* If driver is provided by employer then all std amounts will be increased by Rs. 900 P.m.

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Concept 11: Deduction [Section 16]

Section 16 (ia) : Standard deduction .

1. Actually salary or
2. Maximum 50,000

Section 16 (ii) : Entertainment Allowance .

Only for govt. employee

Section 16 (iii) : Profession tax / Employment tax

Deduction is allowed only on payment basis

If Profession tax is paid by employer

Step 1 : Taxable as salary ( perquisites )

Step 2 : Deduction allowed u/s 16

Concept 12: TDS implication on Salary [Form 16]

Sec Nature of Threshold Limit for Payer Payee Rate of TDS

payment TDS

192 Salary BEL (2,50,000/ Any Person Individual Average rate

3,00,000, as the /Employee of income- tax
case may be). This is computed on
taken care of in the basis of
computation of the the rates in
average rate of force
income-tax.

192A Premature Payment or Trustees of Individual 10% [In case

withdrawal aggregate payment ≥ the EPF /Employee of failure to
from Rs. 50,000 Scheme or any furnish PAN,
Employee authorised TDS@
Provident person under Maximum
Fund the Scheme Marginal Rate]

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Concept 13: Computation of Relief u/s 89

Relevant PY – Year of receipt of Arrears of salary:

Tax on total income (including arrears of salary) xxx
Tax on total income (excluding arrears of salary) (xxx)
Tax on arrears (difference b/w above) –[A] xxx
Relevant PY – Year to which Arrears of salary pertain:
Tax on total income (including arrears of salary) xxx
Tax on total income (excluding arrears of salary) (xxx)
Tax on arrears (difference b/w above) –[B] xxx

Relief u/s 89 [A-B] xxx

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