Old V/S New Regime

Rates under Default tax regime (115BAC)

Rebate under 87A (Only in case of Resident)- If total income does not exceeds ₹ 7,00,000 –
Rebate is least of following-

1. ₹ 25,000
2. Amount of Tax
 Rates under Optional tax regime

Taxable Income Individuals <60 Resident Sr Resident Super Sr

Years Citizens>=60 <80 Citizens 80 Years and
Years above
Up to ₹ 2,50,000 Nil Nil Nil
₹ 2,50,000 To ₹ 3,00,000 5% Nil Nil

₹ 3,00,000 To ₹ 5,00,000 5% 5% Nil

₹ 5,00,000 To ₹ 10,00,000 20% 20% 20%

Above ₹ 10,00,000 30% 30% 30%

Rebate under 87A (Only in Case of Resident)- If total income does not exceeds ₹ 5,00,000 –
Rebate is least of following-

1. ₹ 12,5,00
2. Amount of Tax
Section 14

INCOME

Income Income
Income Income Income
Under Head Under Head
Under Head Under Head Under Head
House Other
Salaries PGBP Capital Gain
Property Sources

Each source of income is required to be classified under respective head.

 UNIT – 1 : SALARIES

INTRODUCTION
The provisions pertaining to Income under the head “Salaries” are contained in section 15, 16
and 17 in the following manner.
Which salary is chargeable under Salary Head :

Employer-employee relationship:

• Before an income can become chargeable under the head ‘salaries’, it is vital that there should exist
between the payer and the payee, the relationship of an employer and an employee & payment must
have been made by the employer in such capacity
• There should exist Master servant relationship between payer and payee.

Contract of Service V/S Contract for service – In contract of service employer can direct and control the duties and the manner of
performance of employee hence employer and employee relationship exists in such contract. However, in case of contract for service the
contractee can simply decide the target to be achieved but can not decide or direct the manner of performance.

Example: Sujata, an actress, is employed in Chopra Films, where she is paid a monthly remuneration of ₹ 2 lakh. She acts in various films
produced by various producers. The remuneration for acting in such films is directly paid to Chopra Films by the different producers.
In this case, ₹ 2 lakh will constitute salary in the hands of Sujata, since the relationship of employer and employee exists between
Chopra Films and Sujata.
Example: In the above example, if Sujata acts in various films and gets fees from different producers, the same income will be chargeable as
income from profession since the relationship of employer and employee does not exist between Sujata and the film producers.
Different Scenarios

1. Commission received by a Director from a company is salary if the Director is an employee of the
company. If, however, the Director is not an employee of the company, the said commission cannot be
charged as salary but has to be charged either as income from business or as income from other sources
depending upon the facts. Directors’ sitting fee is taxable under the head “Income from other sources
2. Salary paid to a partner by a firm is nothing but an appropriation of profits. Any salary, bonus, commission
or remuneration by whatever name called due to or received by partner of a firm shall not be regarded as
salary. The same is to be charged as income from profits and gains of business or profession. This is
primarily because the relationship between the firm and its partners is not that of an employer and employee.
3. Remuneration received by a Member of Parliament/State Legislature is not taxable under the head
‘Salaries’ as such person is not a government employee. Such income would be taxable as ‘Income from Other
Sources’.
4. Salary received by judges is taxable under head salaries
5. Income from Tip is chargeable under head Other sources, as tips being received from customers and not
employer
6. An Official liquidator appointed by Court or CG would also become employee of Central Government,
hence remuneration due to him is chargeable under the head salaries
7. Professor / teacher of a college receives fees from an university for checking answer sheets or for
setting exam paper is not taxable under head Salaries as University is not employer of the teacher, it is
taxable under head Income from other sources.
Important Concepts relating to Salary :

1. Full-time or part-time employment: Once the relationship of employer and employee exists, the income is to
be charged under the head “salaries”. It does not matter whether the employee is a full-time employee or a
part-time one.
If, for example, an employee works with more than one employer, salaries received from all the employers
should be clubbed and brought to charge for the relevant previous years.
2. Forgoing of salary: Once salary accrues, the subsequent waiver by the employee does not absolve him
from liability to income-tax. Such waiver is only an application and hence, chargeable to tax.
Example: Mr. A, an employee instructs his employer that he is not interested in receiving the salary for April 2024
and the same might be donated to a charitable institution.. – Application of income and chargeable
3. Surrender of salary: However, if an employee surrenders his salary, in the public interest, to the Central
Government under section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the
salary s o surrendered would be exempt while computing his taxable income.
4. Salary paid tax-free: This, in other words, means that the employer bears the burden of the tax on the
salary of the employee. In such a case, the income from salaries in the hands of the employee will consist of
his salary income and also the tax on this salary paid by the employer. However, as per section 10(10CC), the
income-tax paid by the employer on non-monetary perquisites on behalf of the employee would be exempt in
the hands of the employee.
5. Place of accrual of salary: Under section 9(1)(ii), salary earned in India is deemed to accrue or arise in India
even if it is paid outside India or it is paid or payable after the contract of employment in India comes to an end.
If an employee is paid pension abroad in respect of services rendered in India, the same will be deemed to accrue
in India. Similarly, leave salary paid abroad in respect of leave earned in India is deemed to accrue or arise in
India.
Section 9(1)(iii) provides that salaries payable by the Government to a citizen of India for services outside India
shall be deemed to accrue or arise in India. However, by virtue of section 10(7), any allowance or perquisites
paid or allowed outside India by the Government to a citizen of India for rendering services outside India will
be fully exempt.

6. Salary and wages – Conceptually not different: Remuneration received by an individual is taxable under
the head “Salaries” whether the remuneration is termed
7. Salary from more than one source: If an individual receives salary from more than one employer during the
same previous year (maybe due to change of employment or due to employment with more than one
employer simultaneously), salary from each source is taxable under the head “Salaries
8. Salary from former employer, present employers or prospective employer: Taxable
 BASIS OF CHARGE [SECTION 15]

Due Or Receipt - Which ever is earlier

(i) Section 15 deals with the basis of charge under the head “Salaries”. Salary is chargeable to tax either
on ‘due’ basis or on ‘receipt’ basis, whichever is earlier.
(ii) Advance Salary – Receipt basis However, where any salary, paid in advance, is assessed in the
year of payment, it cannot be subsequently brought to tax in the year in which it becomes due.
(iii) Arrear – On Receipt basis, if not taxed on due basis earlier (as it may not be possible to bring the
same to charge on due basis.) However If the salary paid in arrears has already been assessed on due
basis, the same cannot be taxed again when it is paid.

Example: If A draws his salary in advance for the month of April 2025 in the month of March 2025 itself, the
same becomes chargeable on receipt basis and is to be assessed as income of the P.Y.2024-25 i.e., A.Y.2025-26.
However, the salary for the A.Y.2026-27 will not include that of April 2025.

Example: If the salary due for March 2025 is received by A later in the month of April 2025, it is still chargeable
as income of the P.Y.2024-25 i.e., A.Y.2025-26 on due basis. Obviously, salary for the A.Y.2026-27 will not include
that of March 2025
Advance Salary
Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not
Difference between advance salary and advance against salary
Loan is different from salary. When an employee takes a loan from his employer, which is repayable in certain
specified installments, the loan amount cannot be brought to tax as salary of the employee.
Similarly, advance against salary is different from advance salary. It is an advance taken by the employee from
his employer. This advance is generally adjusted with his salary over a specified time period. It cannot be taxed
as salary.

Arrears of salary
Normally speaking, salary arrears must be charged on due basis. However, there are circumstances when it may
not be possible to bring the same to charge on due basis.

Example: If the Pay Commission is appointed by the Central Government and it recommends revision of salaries of
employees with retrospective date, the arrears received in that connection will be charged on receipt basis. Here also,
relief under section 89 is available.

Example: If the Central Government announces an increase in HRA in the P.Y. 2024-25 which is effective from 1.1.2023,
then the arrears from 1.1.2023 to 31.3.3024 will be taxed in the previous year in which they are paid because they were
never due earlier. Here also, relief under section 89 is available.
Numerical Problems on Basic Concept
Q 1. Mr. Sharma's basic salary is ₹50,000 per month. He salary due at end of same month, but for march he received
it on the 10th of April. Calculate whether the salary for March will be taxable in the financial year ending on 31st
March or the next financial year.

Yes, ₹ 50,000

Q 2. Mr. Varun earns a basic salary of ₹60,000 per month. His salary for each month is due on the 1st of the following
month and is credited to his account on the 7th of next month. Calculate the total salary taxable for the financial year
April 1, 2024, to March 31, 2025. DOJ- 1st Jan 2023.

7,20,000

Q 3. Mr. X joined ABC Ltd. on 1st May 2024 with a starting salary of ₹70,000 per month. His salary was increased to
₹90,000 per month effective from 1st January 2025. Salaries are due and paid on the 1st day of the following month.
Calculate the total salary Mr. X would earn for the financial year 2024-25

7,40,000
 Pay Scale/Grade Pay – It is system where increment scale is pre known to employee.

40,000-5,000-60,000-7,000-88,000

Q4
Mr. Raghav was appointed as a manager of ABC Pvt. Ltd. on 1st January 2024 in the pay grade of ₹18,500 – 1000 –
28,000 at a basic pay of ₹18,500 per month. Compute his salary income for the previous year 2024-25 under the
following scenarios:
(a) Salary due and received on the last of every month.
(b) Salary due and received on the 1st day of next month.
Ans
(a) ₹2,25,000.
(b) ₹2,24,000.
Q 4. Mr. X joined A Ltd. for a salary of ₹ 27,000 p.m. on 1/4/2022. In the year 2023-24, his increment decision was
pending. On 1/12/2024, his increment was finalized as for 2023-24: ₹ 5,000 p.m. and for 2024-25 ₹ 7,500 p.m. Such
arrear salary received on 5/12/2024. Find Gross taxable salary. Further, salary of April 2025 has also been received in
advance on 15/03/2025.

Particulars Workings Amount

Salary for 2024-25 (27,000 + 5,000 + 7,500) x 4,74,,000

12
Arrear salary for 2023-24 (5,000) x 12 60,000
Advance salary for April 2025 39,500
Gross total salary 5,73,500
SALARY, PERQUISITE AND PROFITS IN
LIEU OF SALARY [SECTION 17]

Meaning of Salary
The term ‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic
salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation,
medical facility, interest free loans etc.).
Section 17(1) defines the term “Salary”. It is an inclusive definition and includes monetary as well as non-
monetary items.
‘Salary’ under section 17(1), includes the following:
(i) wages,
(ii) any annuity or pension, any gratuity,
(iii) any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages,
any advance of salary,
(iv)
(v) any payment received in respect of any period of leave not availed by him i.e., leave salary or leave
encashment,
(vi)
(vii)
Provident Fund:
- the portion of the annual accretion in any previous year to the balance at the credit of an employee
participating in a recognised provident fund to the extent it is taxable and
- transferred balance in recognized provident fund to the extent it is taxable,
(viii) the contribution made by the Central Government or any other employer in the previous year to the
account of an employee under a pension scheme referred to in section 80CCD.
(ix) the contribution made by the Central Government in the previous year, to the Agniveer Corpus Fund
account of an individual enrolled in the Agnipath Scheme referred to in section 80CCH.
 Allowances
Fully Taxable under both regimes Fully Taxable under default tax Fully Exempt only under Fully Exempt under both tax
regime/ Partly Exempt under the the optional tax regime regimes
optional tax regime

(i) Entertainment Allowance (i) House Rent Allowance (i) Allowances to High Allowance granted to Government
(ii) Dearness Allowance [u/s 10(13A)] Court Judges employees outside India [Section
(ii) Special Allowances [u/s (ii) Salary and 10(7)]
(iii) Overtime Allowance
(iv) Fixed Medical 10(14)] Allowances paid by
Allowance Except the United Nations
(v) City Compensatory Allowance (to (a) Travelling allowance Organization
meet increased cost of living in (b)Daily allowance (iii) Sumptuary allowance
cities) (c) Conveyance allowance granted to High
(vi) Interim Allowance Court or Supreme
(d)Transport allowance to
Court Judges
(vii)Servant Allowance blind/ deaf and
(viii)Project Allowance dumb/ orthopedically Note – In cases (i) and (iii)
(ix) Tiffin/Lunch/Dinner handicapped employee above, the respective Acts
provide for such exemption,
Allowance Note – The exceptions in (a) to (d)
notwithstanding anything
(x) Any other cash allowance above are partly exempt under contained in the Income tax
(xi) Warden Allowance both the tax regimes. Act, 1961. In case (ii),
(xii)Non-practicing Allowance exemption is provided under
(xiii)Transport allowance to employee the respective Act,
notwithstanding anything to
other than blind/ deaf and dumb/
the contrary contained in any
orthopedically handicapped employee other law.
(Special allowances to meet expenses relating to duties or personal expenses [Section 10(14)]
This clause provides for exemption (as per Rule 2BB) in respect of the following:

Rule 2 BB

Sec 10(14) (i) Sec 10(14) (ii)

Necessary in the performance of duties To meet his personal expenses at place where
he performs duties

Exempt Under Optional Regime Exempt Under Both Regime Exempt Under Optional Regime Exempt Under Both Regime

Helper/Assistant Travelling Allowance

Allowance Transport Allowance to
Check in Table 1
handicapped

Research Allowance Daily Allowance

Conveyance
Uniform Allowance Allowance

Exempted up to actual amount spent on performing duties

rest is taxable
1) Travelling Allowance : any allowance granted to meet the cost of travel on tour or on transfer (includes any sum
paid in connection with the transfer, packing and transportation of personal effects on such transfer.)
2) Daily allowance : any allowance, whether granted on tour or for the period of journey in connection with transfer,
to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty
3) Conveyance Allowance : any allowance granted to meet the expenditure incurred on conveyance in performance
of duties of an office or employment of profit
4) Helper Allowance : any allowance granted to meet the expenditure incurred on a helper where such helper is
engaged in the performance of the duties of an office or employment of profit
5) Research allowance : any allowance granted for encouraging the academic, research and training pursuits in
educational and research institutions Also known as Academic or Professional development allowance
6) Uniform Allowance : any allowance granted to meet the expenditure on the purchase or maintenance of uniform
for wear during the performance of the duties of an office or employment of profit
Note : Dress allowance is fully taxable.
Allowances prescribed for the purposes of section 10(14)(ii) (Table No. 1)
Name of Allowances Extent to which allowanceis exempt

Children Education Allowance (Includes adopted child) ₹ 100 per month per child upto a maximum of two
children
Children Hostel Expenditure (Includes adopted child) ₹ 300 per month per child upto a maximum of two
children
Underground Allowance granted to an employee who is working in ₹ 800 per month
uncongenial, unnatural climate in underground mines.
Special Compensatory (TribalAreas/Schedule Areas/AgencyAreas) ₹ 200 per month
Allowance [Specified States]
Any Special Compensatory Allowance in the nature of border area ₹ 1,300 or ₹ 1,100or
allowance or remote locality allowance or difficult area allowance or ₹ 1,050 or ₹ 750 or ₹ 300 or
disturbed area allowance ₹ 200 per month depending upon the specified
locations
Compensatory (Hilly Areas) Allowance or High Altitude Allowance ₹ 800 or ₹ 300 per month depending upon the
or Uncongenial Climate Allowance or Snow Bound Area Allowance or specified locations
Avalanche Allowance Compensatory (Hilly Areas) Allowance or ₹ 7,000 per month in Siachen area of Jammu and
High Altitude Allowance or Uncongenial Climate Allowance or Snow Kashmir
Bound Area Allowance or Avalanche Allowance

Transport allowance granted to an employee who is blind or deaf ₹ 32,00 Per month
and dumb or orthopedically handicapped with disability of the lower
extremities of the body, to meet his expenditure for commuting
between his residence and place of duty
 Name of Allowance Extent to which allowance is exempt
Any allowance granted to an employee working in any 70% of such allowance up to a maximum of ₹
transport system to meet his personal expenditure during his 10,000 per month
duty performed in the course of running such transport from one Whichever is less of above
place to another, provided that such employee is not in receipt of
daily allowance
Compensatory Field Area Allowance [Specified areas in ₹ 2,600 per month
Specified States]
Compensatory Modified Field Area Allowance [Specified ₹ 1,000 per month
areas in Specified States]
Any special allowance in the nature of counter insurgency ₹ 3,900 per month
allowance granted to the members of the armed forces
operating in areas away from their permanent locations.
Any special allowance in the nature of high Altitude allowance
granted to the member of the armed forces operating in high
altitude areas
For altitude of 9,000 to 15,000 feet ₹ 1,060 per month
For above 15,000 feet ₹ 1,600 per month
Island (duty) allowance granted to the member of the armed forces in ₹ 3,250 per month
Andaman & Nicobar and Lakshadweep Group of Islands
Any special allowance in the nature of special compensatory highly ₹ 4,200 per month
active field area allowance granted to the member of the armed
Numerical Problems on Allowances

1. Mr. Srikant has two daughters. He receives a children education allowance of ₹180 per month for his elder
daughter and ₹90 per month for his younger daughter. Both his daughters are attending school. Calculate
amount taxable in respect of above allowances if he opts out of default tax regime.

2. Mr. Praveen has three children and receives a total of ₹240 per month as children education allowance. Calculate
the taxable amount of the allowance assuming that he opts out the default tax regime.

3. Mr. Kashyap received basic salary of ₹ 20,000 p.m. from his employer. He also received children education
allowance of ₹3,000 for three children and transport allowance of ₹ 1,800 p.m. Assume he exercises the
option of shifting out of the default regime provided under section 115BAC(1A). The amount of Gross salary
chargeable to tax for P.Y. 2024-25 is –

(a) ₹ 2,62,600
(b) ₹ 1,87,600
(c) ₹ 2,11,600
(d) ₹ 2,12,000
House rent allowance [Section 10(13A)]:
HRA is a special allowance specifically granted to an employee by his employer towards payment of rent for residence
of the employee.

Least of the following is Exempt

Metro Cities (i.e., Delhi, Kolkata, Mumbai, Other Cities
Chennai)
1) HRA actually received for the relevant period 1) HRA actually received for the relevant period

2) Rent paid (-) 10% of salary for the relevant 2) Rent paid (-) 10% of salary for the relevant
period period
3) 50% of salary for the relevant period 3) 40% of salary for the relevant period

Salary for HRA calculation = Basic + DA (If it forms part of Retirement benefits) + Commission
as a fixed % on turnover
 Salary shall be determined on due basis for the period for which employer occupies the accommodation
and gets HRA in previous year
 Exemption is not available to an assessee who lives in his own house, or in a house for which he has
not incurred the expenditure of rent.
 “Salary” for this purpose means basic salary, dearness allowance, if provided in terms of employment
and commission as a fixed percentage of turnover.
 Relevant period means the period during which the said accommodation was occupied by the assessee
during the previous year.
 Exemption u/s 10(13A) would be available to an assessee only if he exercises the option of shifting out
of the default tax regime provided u/s 115BAC(1A). It is not available under the default tax regime
u/s 115BAC
• Salary from all employers will be taken into account if he/she is employed by two or more employers

HRA exemptions depends on following :

1. Place of Residence (Not place of employment)
2. Salary
3. HRA Received
4. Rent Paid
Numerical Problems on HRA

Q4. Nitin, a resident of Ajmer, receives ₹50,000 as basic salary during the previous year 2024-25. In addition, he
gets ₹5,000 as dearness allowance forming part of basic salary, 6% commission on sales made by him (sale
made by X during the relevant previous year is ₹90,000) and ₹7,000 as house rent allowance. He, however, pays
₹7,000 as house rent. Determine the quantum of exempted house rent allowance, if he opts out default regime.
What if he paid rent of ₹ 6,000 only ?

Particulars Details Amount

House Rent Allowance Received 7,000

Less: Minimum of the following being exempted u/s 10(13A)

a) Actual Amount Received 7,000

b) 40% of Salary (Note) 24,160
c) Rent paid – 10% of salary [₹7,000 – ₹6,040] 960 960
Taxable House Rent Allowance 6,040

Basic salary
₹50,000
Dearness Allowance ₹5,000
Commission (6% of ₹90,000) ₹5,4,00
Total ₹60,400
Q5. Anirudh stays in New Delhi. His basic salary is ₹10,000 p.m., D.A. (60% of which forms part of pay) is
₹6,000 p.m., HRA is ₹5,000 p.m. and he is entitled to a commission of 1% on the turnover achieved by him.
Anirudh pays a rent of ₹5,500 p.m. The turnover achieved by him during the current year is ₹12 lakhs. The
amount of HRA exempt under section 10(13A), if he exercises the option of shifting out of the default
regime provided under section 115BAC(1A), is –
(a) ₹48,480
(b) ₹45,600
(c) ₹49,680
(d) ₹46,800
Q 6. Mr. Raj Kumar has the following receipts from his employer:
(1) Basic pay ₹40,000 p.m.
(2) Dearness allowance (D.A.) ₹6,000 p.m.
(3) Commission ₹50,000 p.a.
(4) House rent allowance ₹15,000 p.m.
Find out the amount of HRA exempt in the hands of Mr. Raj Kumar assuming that he paid a rent of ₹16,000 p.m.
for his accommodation at Kanpur. DA forms part of salary for retirement benefits. Mr. Raj Kumar exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A)
Numerical Problems on Overall Allowances

Q1. Ms. Sara joined Star Ltd. on 1/4/2024. Calculate her gross taxable salary for the AY 2025-2026 if she opts
out of default regime. Details regarding his salary are as follows:

Particulars Amount ₹
Basic 6,000 p.m.
Dearness Allowance 2,000 p.m. (50% considered for retirement benefit)
Education Allowance 1,000 p.m. (he has 1 son and 3 daughters)
Hostel Allowance 2,000 p.m. (none of the children is sent to hostel)
Medical Allowance 1,000 p.m. (total medical expenditure incurred ₹3,000)
Transport Allowance 2,000 p.m. (being used for office to residence & vice versa)
Servant Allowance 1,000 p.m.
City compensatory Allowance 2,000 p.m.
Entertainment Allowance 1,000 p.m.
Assistants Allowance 3,000 p.m. (paid to assistant ₹2,000 p.m.)
Development Allowance 2,000 p.m. (actual expenses for the purpose ₹8,000p.m.)
Bonus 30,000 p.a.
Commission 12,000 p.a.
Fees 6,000 p.a.
 Particulars Details Amount Amount ₹
Basic Salary 72,000
Bonus 30,000
Commission 12,000
Fees 6,000
Allowances
Dearness Allowance 24,000
Education Allowance 12,000
Less: Exemption (₹100 x 2 x 12) 2,400 9,600
Hostel Allowance 24,000
Less: Exemption (₹300 x 2 x 12) 7,200 16,800
Medical Allowance 12,000
Transport Allowance 24,000
Less: Exemption Nil 24,000
Servant Allowance 12,000
City Compensatory allowance 24,000
Entertainment Allowance 12,000
Assistance Allowance 36,000
Less: Exemption (Being actual expenditure) 24,000 12,000
Development allowance 24,000
Less: Exemption (Actual expenditure max. of amount received) 24,000 Nil 1,44,000

Gross Taxable Salary 2,64,000

Q2 Mr. Srikant has two sons. He is in receipt of children education allowance of ₹150 p.m. for his elder son and ₹70 p.m.
for his younger son. Both his sons are going to school. He also receives the following allowances:
Transport allowance : ₹1,800 p.m.
Tribal area allowance : ₹500 p.m.
Compute his taxable allowances
Taxable allowance in the hands of Mr. Srikant is computed as under -
If Mr. Srikant exercises the option of shifting out of the default tax regime provided under
section 115BAC
Children Education Allowance:
Elder son [(₹150 – ₹100) p.m. × 12 months] = ₹600
Younger son [(₹70 – ₹70) p.m. × 12 months]= Nil ₹600

Transport allowance (₹1,800 p.m. × 12 months) ₹21,600

Tribal area allowance [(₹500 – ₹200) p.m. × 12 months] ₹3,600

Taxable allowances ₹25,800

If Mr. Srikant pays tax under default tax regime under section 115BAC
Children Education Allowance [(₹150 + ₹70) p.m. × 12 months] ₹2,640
Transport allowance (₹1,800 p.m. × 12 months) ₹21,600
Tribal area allowance (₹500 p.m. × 12 months) ₹6,000
Taxable allowances ₹30,240
 Retirement Benefits

Retirement Benefits

Leave Retrenchment
Pension Gratuity VRS & Other
Encashment
 Retirement Benefits
Gratuity/Leave Encashment/Pension

Non Recurring
Recurring Nature
Nature
(During Service)
(At Retirement)

Taxable
Government Non Government
Employees Employees

Exempt Limit
Annuity or Pension

Meaning of Annuity :
If a person invests some money entitling him to series of equal annual sums, such annual sums are annuities
in the hands of the investor.
• Annuity received by a present employer is to be taxed as salary (Fully taxable)
• Annuity received from a past employer is taxable as profit in lieu of salary (Fully taxable)
• Annuity received from person other than an employer is taxable as “income from other sources”. (Fully taxable)
 Retirement Benefits

1. Pension
Meaning of Pension :
Periodic payment made especially by Government or a company or other employers to the employee in
consideration of past service payable after his retirement.
Pension is of two types: commuted and uncommuted.
Uncommuted Pension: Uncommuted pension refers to pension received periodically
Commuted Pension: Commutation means inter-change. Commuted pension means lump sum amount taken
by commuting the whole or part of the pension
Example:
Suppose a person is entitled to receive a pension of say ₹10,000 p.m. for the rest of his life. He may commute ¼th
i.e., 25% of this amount and get a lumpsum of say ₹1,50,000. After commutation, his pension will now be the
balance 75% of ₹10,000 p.m. = ₹7,500 p.m.
Exemption in respect of Commuted Pension [Section 10(10A)]
Pension

Uncommuted Commuted

Fully Other Employees Employees of the Central

taxable Government/ local
authorities/Statutory Corporation/
If the employee does If the employee is in members of Civil Services/
not receive any receipt of gratuity Defence Services etc.
gratuity
Fully exempt u/s
10(10A)(i)
1/2 x (commuted 1/3 x (commuted pension
pension received ÷ received ÷ commutation %) x
commutation %) x 100, 100, would be exempt u/s
would be exempt u/s 10(10A)(ii)(a)
10(10A)(ii)(b)

 Exemption u/s 10(10A) in respect of commuted pension is available to an assessee irrespective of the
regime under which he pays tax.
 Judges of the Supreme Court and High Court will be entitled to the exemption of the commuted portion
u/s 10(10A)(i).
Exemption in respect of pension received by recipient of gallantry awards [Section 10(18)] (Irrespective of Tax
Regime)
Any income by way of pension received by an individual is exempt from income- tax if -
a) such individual was an employee of Central or State Government and
b) has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or such other gallantry award notified
by the Central Government in this behalf.

In case of the death of such individual, any income by way of family pension received by any member of the family
of such individual shall also be exempt under this clause.

“Family”, in relation to an individual, means –

The spouse and children of the individual; and
The parents, brothers and sisters of the individuals or any of them, wholly or mainly dependent on the individual.

Exemption of disability pension granted to disabled personnel of armed forces who have been invalided on
account of disability attributable to or aggravated by such service [Circular No. 13/2019, dated 24.6.2019]
Pension to such employees is Exempt Irrespective of Rank
- not available to personnel who have been retired on superannuation or otherwise in normal course
Numerical Problems on Pension

Q1. Mr. Sagar who retired on 1.10.2024 is receiving ₹5,000 p.m. as pension. On 1.2.2025, he commuted 60% of his
pension and received ₹3,00,000 as commuted pension. You are required to compute his taxable pension assuming:
• He is a government employee.
• He is a private sector employee and received gratuity of ₹5,00,000 at the time of retirement.
• He is a private sector employee and did not receive any gratuity at the time of retirement.
(a) He is a government employee
Uncommuted pension received (October – March) ₹24,000
[(₹5,000 × 4 months) + (40% of ₹5,000 × 2 months)]
Commuted pension received ₹3,00,000
Less: Exempt u/s 10(10A) ₹3,00,000 NIL
Taxable pension ₹24,000

(b) He is a private sector employee and received gratuity ₹5,00,000 at the time of retirement
Uncommuted pension received (October – March) ₹ 24,000
[(₹5,000 × 4 months) + (40% of ₹5,000 × 2 months)]
Commuted pension received ₹ 3,00,000
Less: Exempt u/s 10(10A)
1/3 x (3,00,000 ÷ 60%) ₹ 1,66,667 ₹ 1,33,333

Taxable pension ₹1,57,333

He is a private sector employee and did not received any gratuity
Uncommuted pension received (October – March) ₹24,000
[(₹5,000 × 4 months) + (40% of ₹5,000 × 2 months)]
Commuted pension received ₹3,00,000
Less: Exempt u/s 10(10A)
1/2 x (3,00,000 ÷ 60%) ₹ 2,50,000 ₹ 50,000

Taxable pension ₹74,000

2. Gratuity
Gratuity is a voluntary payment made by an employer in appreciation of services rendered by the employee
Exemption in respect of Gratuity [Section 10(10)]

Gratuity

Covered under Gratuity Act 1972 Not Covered under Gratuity Act 1972
a) Exemption in respect of Gratuity If Covered by Gratuity Act 1972

Gratuity

Received during Received at the time of

service retirement/Death

Fully Received under the Pension Code or Other Employees

taxable Other Employees Regulations
applicable to members of the Defence
Service/ Employees of Central Least of Following is exempted :
Government/ Members of Civil 1. Actual amount Received
Services/ local authority employees 2. ₹ 20 Lakhs
etc 3. 15 working days salary for each
completed year of service
Fully exempt u/s (15/26 x Last drawn salary x No of
10(10A)(i) completed Service year)
Here-

 Salary = Basic + DA (DA always becomes part of salary here)

 No of working days taken in month = 26
 More than 6 month = 1 Year

• Where gratuity is received from 2 or more employers in the same previous year, then, aggregate amount of gratuity
exempt from tax cannot exceed ₹20,00,000.
• Where gratuity is received in any earlier previous year from former employer and again received from another
employer in a later previous year, the limit of ₹ 20,00,000 will be reduced by the amount of gratuity exempt earlier.
• Exemption under section 10(10) would be available to an assessee irrespective of the regime under which he pays
tax.
b) Exemption in respect of Gratuity [Section 10(10)] If not Covered
by Gratuity Act 1972 *Any death cum retirement gratuity received
by an employee on his retirement or his
becoming incapacitated prior to such
retirement or on his termination or any
Gratuity gratuity received by his widow, children or
dependents on his death
Received during *Received at the time of
service retirement/Death

Fully Received under the Pension Code or Other Employees

taxable Other Employees Regulations
applicable to members of the Defence
Service/ Employees of Central Least of Following is exempted :
Government/ Members of Civil 1. Actual amount Received
Services/ local authority employees 2. ₹ 20 Lakhs
etc 3. Half month salary salary for
each completed year of service
Fully exempt u/s (1/2 x Last 10 month average salary
10(10A)(i) x No of completed Service year)
Here-

 Salary = Basic +dearness allowance (if provided in the terms of employment for retirement benefits, forming
part of salary) + Commission on fixed percentage of Turnover
 Salary shall be taken on basis of 10 months average just preceding the month of retirement
 For calculation of Completed year of service – Fractions ignored

• Where gratuity is received from 2 or more employers in the same previous year, then, aggregate amount of gratuity
exempt from tax cannot exceed ₹20,00,000.
• Where gratuity is received in any earlier previous year from former employer and again received from another
employer in a later previous year, the limit of ₹ 20,00,000 will be reduced by the amount of gratuity exempt earlier.
• Exemption under section 10(10) would be available to an assessee irrespective of the regime under which he pays
tax.
Numerical Problems on Gratuity
Q1. Mr. Ravi retired on 15.6.2024 after completion of 26 years 8 months of service and received gratuity of
₹ 15,00,000. At the time of retirement, his salary was:
Basic Salary : ₹ 50,000 p.m.
Dearness Allowance : ₹ 10,000 p.m. (60% of which is for retirement benefits)
Commission : 1% of turnover (turnover in the last 12 months was ₹ 1,20,00,000)
Bonus : ₹ 25,000 p.a.
Compute his taxable gratuity assuming :
a. He is private sector employee and covered by the Payment of Gratuity Act, 1972.
b. He is private sector employee and not covered by Payment of Gratuity Act, 1972.
c. He is a Government employee.
(a) He is covered by the Payment of Gratuity Act 1972 -
Gratuity received at the time of retirement ₹ 15,00,000
Less: Exemption under section 10(10)

Least of the following:

i. Gratuity received ₹ 15,00,000
ii. Statutory limit ₹ 20,00,000
iii. 15 days’ salary based on last drawn salary for
each completed year of service or part thereof
in excess of 6 months
15/26 × last drawn salary × years of service

15/26 × (50,000 + 10,000) x 27= ₹ 9,34,615 ₹ 9,34,615

Taxable Gratuity ₹ 5,65,385

(b) He is not covered by the Payment of Gratuity Act 1972 -
Gratuity received at the time of retirement ₹ 15,00,000
Less: Exemption under section 10(10) (Note) ₹ 8,58,000

Taxable Gratuity ₹ 6,42,000

Note :
Exemption is Least of the following:
i. Gratuity received ₹ 15,00,000
ii. Statutory limit ₹ 20,00,000
(iii) Half month’s salary based on average salary of last 10 months preceding the
month of retirement for each completed year of service. ₹ 8,58,000
1/2 × Avg Salary × years of service
1 x (50,000 x 10) + (10,000 x 60% x 10) + (1% x 1,20,000,00 x 10/12) x 26
2
10 ₹ 8,58,000
(c) He is a government employee
Gratuity received at the time of retirement ₹ 15,00,000
Less: Exemption under section 10(10) ₹ 15,00,000

Taxable Gratuity NIL

3. Leave Encashment
Generally, employees are allowed to take leave during the period of service. Employees may avail such leave or in
case the leave is not availed, then the leave may either lapse or be accumulated for future or allowed to be
encashed every year or at the time termination/ retirement. –Part of Salary
Exemption of amount received by way of encashment of unutilised earned leave on retirement
[Section 10(10AA)]
 Salary for this purpose =
Basic salary
A d d D earness allowance, if provided in the terms of employment for retirement benefits
Add Commission which is expressed as a fixed percentage of turnover.
 Average salary’ will be determined on the basis of the salary drawn during the period of ten months immediately
preceding the date of his retirement
 Exemption under section 10(10AA) would be available to an assessee irrespective of the regime under which he
pays tax.
 Where leave salary is received from two or more employers in the same previous year, then the aggregate amount
of leave salary exempt from tax cannot exceed ₹ 25,00,000
 Numerical Problems on Leave Encashment
Q 1.
Retrenchment compensation [Section 10(10B)]
Retrenchment means cancellation of contract of service by employer.

The retrenchment compensation means the compensation paid under Industrial Disputes Act, 1947
or under any Act, Rule, Order or Notification issued under any law.
However, the retrenchment compensation would be exempt under section 10(10B), subject to
following limits.
a) Actual Amount received
b ) ₹ 5,00,000 as may be notified by the Central Government in this behalf,
c) Amount calculated in accordance with the provisions of section 25F of the Industrial Disputes
Act, 1947
i.e., 15 working days average pay x completed years of service and part thereof in excess of 6
months
(15/26 x Average monthly salary x completed year of service)
whichever is lower.

Average – 3 months preceding the date of retirement

 Fully exempted if scheme approved by the Central Government

 Average pay means average of the wages payable to a workman

• in the case of monthly paid workman, in the three complete calendar months,
• in the case of weekly paid workman, in the four calendar weeks,
• in the case of daily paid workman, in the twelve full working weeks,
preceding the date on which the average pay becomes payable & where such calculation cannot be made,
the average pay shall be calculated as the average of the wages payable to a workman during the period he
actually worked.(Daily Average)

 Wages for this purpose means all remuneration capable of being expressed in terms of money, which would, if the
terms of employment, expressed or implied, were fulfilled, be payable to a workman in respect of his employment
or of work done in such employment, and includes
• such allowances including DA as the workman is for the time being entitled to; (DA always)
• the value of any house accommodation, or of supply of light, water, medical attendance or other amenity or of
any other service or of any concessional supply of food grains or other articles;
• any travel concession; and
• any commission payable on the promotion of sales or business or both
However, it does not include
• any bonus;
• contribution to a retirement benefit scheme;(PF contribution by employer)
• any gratuity payable on the termination of his service.
Voluntary Retirement Receipts [Section 10(10C)]

Lump sum payment or otherwise received by an employee at the time of voluntary retirement would be taxable
as “profits in lieu of salary”. However, it would be exempt under section 10(10C), subject to the following
conditions
Eligible Undertakings - The employees of the following undertakings are eligible for exemption under this
clause:
1) Public sector company
2) Any other company
3) An authority established under a Central/State or Provincial Act
4) A local authority
5) A co-operative society
6) An University established or incorporated under a Central/State or Provincial Act and an Institution declared to be
an University by the University Grants Commission
7) An Indian Institute of Technology
8) Such Institute of Management as the Central Government may, by notification in the Official Gazette, specify in this
behalf
9) Any State Government
10) The Central Government
11) An institution, having importance throughout India or in any State or States, as the Central Government may
specify by notification in the Official Gazette.
Rule 2BA prescribes that the exemption under this section would be available to an employee who has
completed 10 years of service or completed 40 years of age except in case of Public sector Company

The amount receivable on account of voluntary retirement or separation of the employee must not exceed –

- the amount equivalent to three months’ salary for each completed year of service or
- salary at the time of retirement multiplied by the balance months of service left before the date of his
retirement or superannuation
Which ever is higher
Notified Limit - ₹ 5 lakhs

In short exemption -
1. Actual amount received Whichever is less
2. ₹ 5,00,000
3. Higher of below-
a)3 month Salary x Completed year of service
b) Salary at time of retirement x balance month of service left
Salary = Basic + DA(If) + Commission on fixed % of Turnover

 Where exemption for voluntary retirement compensation under section 10(10C) has been allowed in any
A.Y., then no exemption thereunder shall be allowed to him in any other A.Y
 Where any relief has been allowed to any assessee u/s 89 for any A.Y. in respect of any amount received or
receivable on his voluntary retirement or termination of service or voluntary separation, no exemption u/s
10(10C) shall be allowed to him in relation to that A.Y. or any
 other A.Y
 Exemption under section 10(10C) would be available to an assessee irrespective of the regime under which
he pays tax.
Numerical Problems on VRS

Q1. Mr. Dutta received voluntary retirement compensation of ₹ 7,00,000 after 30 years 4 months of service. He
still has 6 years of service left. At the time of voluntary retirement, he was drawing basic salary ₹ 20,000 p.m.;
Dearness allowance (which forms part of pay) ₹ 5,000 p.m. Compute his taxable voluntary retirement
compensation, assuming that he does not claim any relief under section 89.
Provident Fund
Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time of his retirement

The credit balance in a provident fund account of an employee consists of the following:
(i) employee’s contribution
(ii) interest on employee’s contribution
(iii) employer’s contribution
(iv) interest on employer’s contribution.
The accumulated balance is paid to the employee at the time of his retirement or resignation. In the case of death of
the employee, the same is paid to his legal heirs
 Types of Provident Funds

Recognised Unrecognised Statutory Public Provident

Provident Fund Provident Fund Provident Fund Fund (PPF)
(RPF) (URPF) (SPF)

Recognised by Not Recognised Governed by Governed by

Commissioner of by Commissioner Provident Funds Public Provident
Income Tax of Income Tax Act, 1925 Fund Act, 1968
It applies to
employees of
government,
railways, semi-
government
institutions,
local bodies,
universities and
all recognised
educational
institutions.
The tax treatment is given below:
 Particulars Recognised PF Unrecognised Statutory PF Public
PF PF

Salary = Basic + DA(If) + Commission on fixed % of Turnover

Exemption of Accumulated balance of RPF, payable to an employee
* Where the accumulated balance in RPF becomes taxable, the tax payable in each of the years would be computed as if the fund
had been an URPF and the difference in tax would be payable by the employee

• If, after termination of his employment with one employer, the employee obtains employment under
another employer, then, only so much of the accumulated balance in his provident fund account will be
exempt which is transferred to his individual account in a recognised provident fund maintained by the
new employer
• Former employer period shall also taken into account for period of 5 years

Interest credited on contribution by such person/employee

1. As per section 10(11), any payment from a Provident Fund (PF) to which Provident Fund Act, 1925, applies or
from Public Provident Fund would be exempt.
2. Accumulated balance due and becoming payable to an employee participating in a Recognized Provident
Fund (RPF) would be exempt under section 10(12).
3. Interest on employees contribution towards SPF Or RPF Exemption cap regarding Interest on or after
1st April 2021 10(11) and 10(12)

2,50,000 (If both employer and employee contribution)

Above this limit Taxable
5,00,000 (if there is no employers contribution)
Q1. Mr. A retires from service on December 31, 2024, after 25 years of service. Following are the particulars of his
income/investments for the previous year 2024-25:

Particulars ₹
Basic pay @ ₹ 16,000 per month for 9 months 1,44,000
Dearness pay (50% forms part of the retirement benefits) ₹ 8,000 per 72,000
month for 9 months
Lumpsum payment received from the Unrecognized Provident Fund 6,00,000
Deposits in the PPF account 40,000

Out of the amount received from the unrecognised provident fund, the employer’s contribution was ₹
2,20,000 and the interest thereon ₹ 50,000. The employee’s contribution was ₹ 2,70,000 and the interest
thereon ₹ 60,000. What is the taxable portion of the amount received from the unrecognized provident fund
in the hands of Mr. A for the assessment year 2025-26?

Will your answer be any different if the fund mentioned above was a recognised provident fund?
is not taxable at the time of withdrawal as this amount has already been taxed as
his salary income.

if the fund mentioned above was a recognised provident fund

Since the fund is a recognised one, and the maturity is taking place after a service of 25 years, the entire
amount received on the maturity of the RPF will be fully exempt from tax.
Perquisite Sec 17(2)
 The term ‘perquisite’ indicates some extra benefit in addition to the amount that may be legally due by way of
contract for services rendered.
 Perquisite may be provided in cash or in kind
 Perquisite may arise in the course of employment or in the course of profession. If it arises from a relationship
of employer-employee, then the value of the perquisite is taxable as salary. However, if it arises during the
course of profession, the value of such perquisite is chargeable as profits and gains of business or profession.
 An unauthorised advantage taken by an employee without his employer’s sanction cannot be considered as a
perquisite under the Act.

Example: Mr. A, an employee, is given a house by his employer. On 31.3.2025, he is terminated from service, but
he continues to occupy the house without the permission of the employer for six more months after which he is
evicted by the employer. The question arises whether the value of the benefit enjoyed by him during the six-month
period can be considered as a perquisite and be charged to salary. It cannot be done since the relationship of
employer-employee ceased to exist after 31.3.2025. However, the definition of income is wide enough to bring the
value of the benefit enjoyed by Mr. A to tax as “Income from other sources”.

Here we will find value of perquisites, so the value is taxable

Here we will not calculate exemption as we directly calculate taxable value only
 1. Provision of sweeper, gardener,
watchman or personal attendant
2. Facility of use of gas, electricity or
water supplied by employer
3. Free or concessional tickets
4. Use of motor car
5. Free or concessional educational
It Simply means if If obligation of
facilities
employer employee met
reimburse by employer
employee bill then taxable for all
taxable for all employees
employees
Meaning of specified employees :

1. Director employee: Whether fulltime or part time, even for a single day in PY OR
2. An employee who has substantial interest in the company : beneficial owner having 20 % or more voting power
in company (Real benefit will be check rather legal ownership) Example Karta) OR
3. Employee drawing in excess of ₹ 50,000

Salary for this purpose =

Basic Salary + Dearness Allowance +
Commission, whether payable monthly
or turnover based +Bonus + Fees + Any
other taxable payment + Any taxable
allowances + Any other monetary
benefits – Deductions under section 16]

If an employee is employed with more than one employer, the aggregate of the salary received from
all employers is to be taken into account in determining the above ceiling limit of ₹ 50,000
Valuation of Perquisites – Employers Expenses = Employees benefit which is value of Perks
(General Rule for understanding)
A. Taxable in case of all employees
1. Value of rent free accommodation/ Value of accommodation provided to employee at a
concessional rate [Sub-rule (1) of Rule 3]
Sl. Circumstances In case of unfurnished In case of furnished accommodation
No. accommodation

(1) (2) (3) (4)

1. Where the accommodation is License fee The value of perquisite as determined under
provided by the Central determined by the Central column (3) should be increased by
Government or any State Government or any State (i) If furniture is owned by employer,
Government to the Government in respect of 10% per annum of the cost of furniture
employees either holding office accommodation in accordance
or post in connection with the with the rules framed by such (including television sets, radio sets,
affairs of the Union or of such Government refrigerators, other household appliances,
State
air- conditioning plant or equipment).
(ii)If such furniture is hired by
employer from a third party,

Amount/Rent paid by employer

Less Amount recovered from
employee
Sl. Circumstances In case of unfurnished In case of furnished accommodation
No. accommodation

(1) (2) (3) (4)

2. Where the accommodation is i. 10% of salary in cities having The value of perquisite as determined under
provided by any other column (3) should be increased by
employer population > 40 lakhs as per (i) If furniture is owned by employer,
2011 census; 10% per annum of the cost of furniture
(a) where the
accommodation is owned by the ii. 7.5% of salary in cities having (including television sets, radio sets,
employer population > 15 lakhs ≤ 40 refrigerators, other household appliances,
lakhs as per 2011 census; air- conditioning plant or equipment).
iii. 5% of salary in other areas, (ii)If such furniture is hired by
employer from a third party,
in respect of the period during
which the said accommodation
was occupied by the employee
Amount/Rent paid by employer
during the previous year
Less Amount recovered from
Less
employee
the rent, if any, actually paid by
Sl. Circumstances In case of unfurnished In case of furnished accommodation
No. accommodation

(1) (2) (3) (4)

2. Where the accommodation is 1. Actual amount of lease rental The value of perquisite as determined under
provided by any other column (3) should be increased by
employer paid or payable by the (i) If furniture is owned by employer,
employer or 10% per annum of the cost of furniture
(b) where the
accommodation is taken on 2. 10% of salary (including television sets, radio sets,
lease or rent by the employer whichever is lower refrigerators, other household appliances,
Less air- conditioning plant or equipment).
the rent, if any, actually paid by
(ii)If such furniture is hired by
the employee.
employer from a third party,

Amount/Rent paid by employer

Less Amount recovered from
employee
Sl. Circumstances In case of unfurnished In case of furnished accommodation
No. accommodation

(1) (2) (3) (4)

3. Where the accommodation is NA 1. Actual charges paid or payable to such
provided by any employer,
whether Government or any hotel of lease rental paid or payable by
other employer, in a hotel. the employer or

Hotel include motel, guest house 2. 24 % of salary paid or payable

or service apartment whichever is lower
for the period during which such
accommodation is provided
Less
the rent, if any, actually paid by the
employee.
However, where the employee is provided
such accommodation for a period not
exceeding in aggregate 15 days on his
transfer from one place to another, there
Case 1

Employee

Transfer
Delhi Mumbai

Retained old House

House facility facility
as well after
transfer

Up to 90 Days House accommodation having lower value will

be taxable
After 90 days both accommodation will be taxable
Case 2
Value of perquisite to be restricted to CII:

Same accommodation is
Accommodation is
continued to be provided
taken on lease by
to the same employee for
employer
more than 1 PY.

Perks value of First PY X CII Of Current PY

CII OF FIRST YEAR

First previous year” means the P.Y. 2023-24 or the previous year in which the accommodation was provided to
the employee, whichever is later.
 Case (3)
Employee serving on deputation: Where the accommodation is provided by the Central Government or any
State Government to an employee who is serving on deputation with any body or undertaking under the control
of such Government,-
the value of perquisite of such an accommodation shall be the amount calculated in accordance with Sl.
No.2.(a) of the above table, as if the accommodation is owned by the employer
 Rent-free official residence provided to a Judge of a High Court or the Supreme Court if they exercise the
option of shifting out of the default tax regime provided under section 115BAC(1A); is exempt
 Accommodation provided in Remote area, Mining site, onshore oil exploration site, dam site etc is exempted

Meaning of Salary for Valuation Rules

Salary includes pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever
name called, from one or more employers, as the case may be. However, it does not include the following, namely–
1. dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the
employee concerned;
2. employer’s contribution to the provident fund account of the employee;
3. allowances which are exempted from the payment of tax;
4. value of the perquisites specified in section 17(2);
5. any payment or expenditure specifically excluded under proviso to section 17(2);
6. lump-sum payments received at the time of termination of service or superannuation or voluntary retirement like gratuity,
severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and similar payments
Q1. Mr. C is a Finance Manager in ABC Ltd. The company has provided him with rent- free unfurnished
accommodation in Mumbai. He gives you the following particulars:
Basic salary ₹ 8,500 p.m.
Dearness Allowance ₹ 2,000 p.m. (30% is for retirement benefits)
Bonus ₹ 1,500 p.m.
Even though the company allotted the house to him on 1.4.2024, he occupied the same only from 1.11.2024.
Calculate the taxable value of the perquisite for A.Y.2025-26.

Solution
Value of the rent free unfurnished accommodation
= 10% of salary for the relevant period
= 10% of [(` 8,500 × 5) + (` 2,000 × 30% × 5) + (` 1,500 × 5)] [See Note below]
= 10% of ` 53,000 = ` 5,300.

Note: Since, Mr. C occupies the house only from 1.11.2024, we have to include the salary due to him only in respect of
months during which he has occupied the accommodation. Hence salary for 5 months (i.e. from 1.11.2024 to
31.03.2025) will be considered.
Q2. Using the data given in the previous question, compute the value of the perquisite if Mr. C is required to pay a rent of
₹ 1,000 p.m. to the company, for the use of this accommodation.

First of all, we have to see whether the accommodation is provided at a concessional rate. If the value of
accommodation computed in prescribed manner exceeds the rent recoverable, or payable by, the assessee, the
accommodation would be deemed to have been provided at a concessional rate.
Value of the accommodation = ₹ 5,300
Less: Rent paid by the employee (` 1,000 × 5) = ₹ 5,000
Perquisite value of accommodation given at a concessional rent = ₹ 300
Exemption in respect of Leave travel concession [Section 10(5)] (Within in India)
(only if employee shifts from default regime)

(i) This clause exempts the leave travel concession (LTC) received by employees from their employers for
proceeding to any place in India,
a. either on leave or
b. after retirement from service or
c. after termination of his service

(ii) The benefit is available to individuals whether citizen or not In respect of

a. Himself/herself, spouse, children
b. Parents, brothers and sisters or any one of them who are wholly or mainly dependent on the individual
(iii) Exemption will be available in respect of 2 journeys performed in a block of 4 calendar years commencing
from the calendar year 1986.
Where such travel concession or assistance is not availed by the individual during any block of 4 calendar
years, one such unavailed LTC will be carried forward to the immediately succeeding block of 4 calendar years
and will be eligible for exemption.
(iv) The exemption u/s 10(5) is for travel cost and does not include stay cost or other cost.
(vi) No exemption can be claimed without performing journey and incurring expenses thereon.

Value of Leave travel concession provided to the High Court judge or the Supreme Court Judge and
members of his family are completely exempt without any conditions under both regime
Exemption =
Actual amount received or Limit which is less

Note: The exemption referred to shall

not be available to more than two
surviving children of an individual
after 1.10.1998. This restrictive sub-
rule shall not apply in respect of
children born before 1.10.1998 and
also in case of multiple births after
one child.

Current Block is
2022-2025
Q1. Mr. D went on a holiday on 25.12.2024 to Delhi with his wife and three children (one son – age 5 years; twin
daughters – age 3 years). They went by flight (economy class) and the total cost of tickets reimbursed by his
employer was ₹ 60,000 (` 45,000 for adults and ₹ 15,000 for the three minor children). Compute the amount of LTC
exempt if Mr. D exercises the option of shifting out of the default tax regime provided under section 115BAC(1A).

Ans Since the son’s age is more than the twin daughters, Mr. D can avail exemption for all his three children. The
restriction of two children is not applicable to multiple births after one child. The holiday being in India and the
journey being performed by air (economy class), the entire reimbursement met by the employer is fully exempt in
the hands of Mr. D, since he is exercising the option of shifting out of the default tax regime provided under section
115BAC(1A).

Q2. In the above question, will there be any difference if among his three children the twins were 5 years old and
the son 3 years old? Discuss.

Ans Since the twins’ age is more than the son, Mr. D cannot avail for exemption for all his three children. LTC
exemption can be availed in respect of only two children.

Taxable LTC = 15,000/3 = 5,000

Exemption = 60,000 – 5,000 = 55,000