Direct Taxes

Salaries

1. Chargeability — Section 15 and section 17

Salary is chargeable to tax on “due” or “receipt” basis whichever is earlier and includes wages, annuity or pension, gratuity, fees, commission, perquisites or profits in lieu of salary, advance salary, leave encashment, etc.

2. Deductions from Salary — Section 16

Standard Deduction [section 16(ia)]
Standard deduction is allowed from A.Y. 2019-20 of ₹ 40,000 or amount of salary whichever is less. With effect from 01.04.2020, it has been increased to ₹ 50,000 or amount of salary whichever is less. (This benefit is also available in respect of pension).
Entertainment Allowance [Section 16(ii)]
For Government employees, the least of —
1. ₹ 5,000; or
2. 20% of salary; or
3. Actual amount of entertainment allowance.
Tax on employment (also known as Profession Tax) on paid basis (Section 16(iii)).

If an assessee opts to pay tax under the new tax regime i.e. under section 115BAC, then he will have to forego all the deductions under section 16 mentioned above.

3. Profits in lieu of Salary [Section 17(3)]

It includes —

Any compensation from employer or former employer on termination or modification of the terms of employment.
Any receipt from employer/former employer or from provident/other fund (other than gratuity, commuted pension, retrenchment compensation, house rent allowance, provident fund or such other funds) to extent not consisting of contributions by assessee/interest on such contributions.
Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
Any sum received before his joining any employment or after cessation of his employment.

4. Allowances and exemptions

Pension [Section 10(10A)]
- Pension is taxable as salary [Section 17(1)(ii)].
- Commuted value of pension is exempt under section 10(10A).
  1. For Government employees, fully exempt
  2. For other employees, following is exempt —
    1. If employee has received gratuity then commuted value of 1/3rd of the pension which he is entitled to receive, and
    2. In any other case, commuted value of 1/2 of the pension which he is entitled to receive
  3. Any payment in commutation of pension received from fund set up by LIC is exempt under section 10(23AAB)
Leave Travel Concession or Assistance [Section 10(5) — Rule 2B]
- Available to Indian as well as foreign citizen for himself/spouse/children/dependent parents, brothers and sisters.
- Limited to amount actually spent on travelling of employee and his family members.
- During employment or on retirement or on termination.
- For travelling to any place in India.
- Allowed twice in a block of four calendar years.
- Block commenced from calendar year 1986. (Current block — 2018-21).
- Exemption on travel concession will not be admissible to more than two surviving children of an individual born after 1-10-1998.
- Allowance in cases of destination connected by air/rail is restricted to economy class air fare of national carrier/A.C. first class fare by shortest route. For places not connected by rail, please refer Rule 2B.
- For carry over of the concession, please refer Rule 2B.
If an assessee opts to pay tax under the new tax regime i.e. under section 115BAC, then he will have to forego Leave Travel Concession or Assistance under section 10(5).
Gratuity [section 10(10)]
Death-cum-retirement gratuity received by the Government employees or employees under Civil Services — wholly exempt from tax.
1. Employees covered by Payment of Gratuity Act. Gratuity limit increased to ₹ 20 lakh.
  Amount received on termination, after continuous service of not less than five years qualifies for exemption.
  
  Exemption is least of the following: (aggregate maximum from any number of employers)
  1. 15 days salary (denominator taken as 26 in case of monthly salary) for every completed year/part thereof in excess of 6 months, or
  2. ₹ 20,00,000/-
  3. Gratuity actually received whichever is less.
2. Other employees — Amount received on retirement, incapacitation, death or termination — Exemption is least of the following : (aggregate maximum from any number of employments)
  1. ₹ 20,00,000/-.
  2. Half month’s salary for each completed year of service; (based on last ten months’ average salary), or
  3. Gratuity actually received.
  For meaning of “salary” refer para 6 below.
Retrenchment Compensation [section 10(10B)]
1. Exempt to the extent of the lower of the following:
  1. Amount calculated in accordance with s. 25F(b) of the Industrial Disputes Act, 1947; or
  2. ₹ 5,00,000/-
2. In cases where the scheme is approved by the Central Government the entire amount is exempt.
Voluntary Retirement Compensation [section 10(10C)]
Any amount received or receivable by an employee of
1. A public sector company, or
2. Any other company, or
3. An authority established under a Central, State or Provincial Act, or
4. A local authority
5. A co-operative society
6. A university established under a Central, State or Provincial Act
7. An Indian Institute of Technology
8. Any State Government; or
9. The Central Government; or
10. Notified institutions having importance throughout India or in any State or States
11. Notified Institute of Management at the time of his voluntary retirement or termination under a scheme framed in accordance with guidelines prescribed by Rule 2BA. Exemption allowable only in one A.Y. restricted to ₹ 5 lakhs. The said limit is relaxed w.e.f. A.Y. 2004-05 to cover VRS payments received in instalments with an overall limit of ₹ 5,00,000.
* The exemption is not available w.e.f. 1-4-2010 on the amount on which any relief has been allowed to the assessee under section 89 for any A.Y. in respect of any amount received or receivable on voluntary retirement or termination, etc.
Tax on perquisite paid by the employer, at his option is exempt from A. Y. 2003-04 [Section 10 (10CC)].
House Rent Allowance [section 10(13A) & Rule 2A]
The least of the following is exempt from tax:
1. 50% of salary, (residential house situated at Mumbai, Kolkata, Delhi or Chennai) and 40% of salary where residential house is situated at any other place;
2. Actual house rent allowance received by the employee;
3. Excess of rent paid over 10% of salary.
If an assessee opts to pay tax under the new tax regime i.e. under section 115BAC, then he will have to forego exemption for house rent allowance under section 10(13A).
Leave Encashment [Section 10(10AA)]
Encashment of earned leave while in service will be treated as income. Section 17(1)(va).

Encashment of earned leave on retirement would however, be exempt to the extent of least of:
1. 10 months salary calculated on the basis of last 10 months average salary; or
2. ₹ 3,00,000/-
3. Amount equivalent to earned leave;
4. Actual amount paid by the employer.
Entitlement to earned leave not to exceed 30 days for every year of actual service.

Limits provided for aggregate maximum from any number of employers.

Encashment of earned leave on retirement would be wholly exempt for employees of Central/State Government.
Medical Benefits (Section 17)
Medical treatment provided to an employee or any member of his family (spouse, children and dependent brothers, sisters and parents) will be exempt in the following cases:
1. Treatment in a hospital (including dispensary or clinic or nursing home) maintained by the employer.
2. Treatment in any hospital maintained by the Government, or any local authority or any other hospital approved by Government.
3. Treatment in respect of prescribed diseases in a hospital approved by the Chief Commissioner, provided certificate from the hospital specifying the disease and receipt for amount paid is attached along with the return of income.
4. Medical insurance only under a Central Government approved scheme.
5. Reimbursement of Insurance premium for mediclaim, etc.
6. Actual expenditure on medical treatment outside India, including expenditure on travel and stay abroad as also on travel and stay abroad of one attendant, to the extent permitted by RBI. Expenditure on travel abroad will be exempt only if the gross annual total income of the employee excluding this perquisite is ₹ 2 lakhs or less.
Special Allowances [section 10(14)]
Following prescribed special allowances are exempt:
1. Allowance, not in the nature of perquisite, granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties, to the extent to which actually incurred.
2. Allowance granted to meet personal expense at the place where duties of his office are ordinarily performed or at the place where he ordinarily resides or to compensate for increased cost of living as may be prescribed in Rule 2BB.
If an assessee opts to pay tax under the new tax regime i.e. under section 115BAC, then he will have to forego exemption for allowances under section 10(14) except for those as may be prescribed for this purpose.
Nature of allowance prescribed under Rule 2BB
1. For cost of travel on tour or on transfer.
2. For ordinary daily charges on account of absence from normal place of duty on tour or for journey in connection with transfer.
3. For conveyance in performance of duties, where free conveyance is not provided.
4. For expenditure on helper engaged for performance of office duties.
5. For encouraging academic research and training pursuits in educational and research institutions.
6. For purchase or maintenance of uniform.
7. Special Compensatory Allowance in specified areas to extent specified.
8. Tribal Area Allowances in specified states up to ₹ 200/- p.m.
9. For meeting personal expenditure of employee of transport system running transport vehicle, up to 70% of allowance, maximum of ₹ 10,000 p.m., provided no daily allowance for the said duty is received.
10. Children educational allowance @ ₹ 100 p.m. per child, maximum of two children.
11. Children hostel allowance @ ₹ 300 p.m. per child, maximum of two children.
12. Compensatory field area allowance in specified areas, @ ₹ 2,600/- p.m.
13. Compensatory modified field area allowance in specified areas @ ₹ 1,000/- p.m.
14. Counter insurgency allowance @ ₹ 3,900 p.m. to members of armed forces.
15. Transport allowance (TA) received by blind or deaf and dumb or orthopaedically handicapped with disability of lower extremities granted to meet expenses for commuting between place of residence and place of duty is exempt up to ₹ 3,200/- per month.
16. Underground allowance granted to employee of underground mines: ₹ 800/- per month.
17. Special allowance in the nature of high altitude to members of armed forces: ₹ 1,060/- per month for altitude of 9,000 to 15,000 ft. or ₹ 1,600/- per month for altitude above 15,000 ft.
18. Special compensatory highly active field area allowance to members of armed forces – ₹ 4,200 per month.
19. Island (duty) allowance to members of armed forces (only in Andaman & Nicobar and Lakshwadeep Group of Islands) – ₹ 3,250/- per month.
If an employee opts to pay tax under the new tax regime i.e. under section 115BAC, then he will have to forego exemption for allowances prescribed under Rule 2BB.

5. Perquisites

Perquisites taxable in hands of all employees
1. Value of rent-free accommodation.
2. Value of concession in rent.
3. Value of any benefit or amenity granted or provided free of cost or at concessional rate in certain cases.
4. Amount paid by employer in respect of any obligation which otherwise would have been payable by employee.
5. Any sum payable either directly or through a fund by employer (other than recognised PF, approved superannuation fund, etc.) to effect an assurance on the life of the employee or to effect a contract for an annuity.
6. Value of any security or sweat equity shares allotted or transferred by employer/former employer as free or concessional cost.
7. An amount of contribution to an approved superannuation fund by the employer, to an extent it exceeds ₹ 1,50,000/- (upto AY 2020-21). W.e.f. AY 2021-22, section 17(2)(vii) is amended to provide aggregate contribution made by the employer to the account of the employee in a recognized Provident Fund, in a National Pension Scheme and in an approved superannuation fund, exceeding ₹ 7,50,000/- in a previous year would be taxable as perquisites in the hands of the employee. Any annual accretion by way of interest, dividend or any other amount of similar nature during the previous year to the balance at the credit of the fund or scheme will be treated as perquisite to the extent it relates to the employer’s taxable contribution.
8. Value of any other fringe benefit or amenity as prescribed.
Determination of the value of prescribed fringe benefit or amenity
i. Interest free or concessional loan

Value of perquisite w.e.f. 1st April 2000, of the loan given to the employee or any member of his household shall be computed at the rates charged by State Bank of India in respect of the loans for the same purpose as advanced by the employer, on the maximum outstanding monthly balance as reduced by interest actually paid by employee – However, perquisite value for loans (net of amount reimbursed under medical insurance scheme) given for medical treatment of specified disease or petty loans up to ₹ 20,000/- is not taxable.
ii. Use of movable assets
Value of benefit shall be 10% p.a. of the actual cost of asset or the rent charges paid by the employer as reduced by amount paid by the employee.

iii. Transfer of movable assets

Value of benefit on transfer of movable asset shall be the actual cost of the asset to the employer as reduced by the amount calculated at 10% of such cost for each completed year of use by the employer and further reduced by the payments made by the employee. The normal wear and tear would be computed at 50% in case of computers and electronic items, and 20% in case of motor cars on the reducing balance method.
Perquisites taxable only in hands of specified employees
Other perquisites are taxable only in the hands of the following specified employees, i.e.,
1. Director-employee.
2. Employee having substantial interest in employer-company.
3. Employee drawing salary in excess of ₹ 50,000/-.
Perquisites not taxable in all cases
The following perquisites are not taxable under CBDT instructions or by virtue of the Act/Rules:
1. The provision of medical facilities as per para 4(i).
2. Free meals provided to all employees in office up to ₹ 50 per day per employee provided by the employer through paid vouchers usable at eating joints.
3. Telephone including mobile phone provided to the employee.
4. Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India.
5. Sum payable by an employer to pension or deferred annuity scheme.
6. Employer’s contribution to staff group insurance scheme.
7. Actual travelling expenses paid/reimbursed for journeys undertaken for business purposes.
8. Payment of annual premium on personal accident policy, if such policy is taken to safeguard the employer’s interest. See CIT vs. Lala Shri Dhar (1922) 84 ITR 192 (Delhi).
9. Rent-free official residence to a High Court or Supreme Court Judge.
10. Rent-free furnished residence to official of Parliament.
11. Conveyance facility to High Court/Supreme Court Judges.
Valuation of perquisites
i. Rent-free unfurnished accommodation (Rule 3)
1. Central and State Government employees Equal to licence fee determined as payable by concerned employee in accordance with rules framed by Government for allotment of houses to its officers as reduced by rent actually paid.
2. Semi-Government and private sector employees.
  1. For accommodation owned by employer
    1. Situated in cities having population exceeding 25 lakhs as per 2001 census –15% of salary in respect of the period of occupying the accommodation by the employee as reduced by the rent actually paid by the employee.
    2. Situated in cities having population exceeding 10 lakhs but not exceeding 25 lakhs, 10% of salary – in respect of the period of occupying the accommodation by the employee as reduced by the rent actually paid by the employee.
    3. Situated in other places – 7.5% of salary.
  2. For accommodation taken on lease or rent – actual rent or 15% of salary, whichever is lower as reduced by rent actually paid by the employee
  3. Accommodation in a hotel (other than provided for a period not exceeding 15 days on the transfer) – least of 24% of salary or actual hotel charges as reduced by rent actually paid by employee
  For meaning of “salary” see Explanation 3 to section 17(2).
ii. Rent-free furnished accommodation
Value of the accommodation as if unfurnished and add:
1. 10% per annum of the original cost of furniture, if furniture is owned by the employer.
2. Actual hire charges (whether paid or payable), if furniture is hired by the employer and reduce the rent actually paid by the employee.
  Furniture includes radio sets, television sets, refrigerators, air-conditioners and other household appliances.
iii. Gas, electricity or water supply provided
1. Where employer has supplied gas, electricity or water for household purposes from his own sources without purchasing from any outside agency, the value of such benefits is manufacturing cost incurred per unit by the employer.
2. Where the employer has supplied gas, electricity or water for household purpose, by purchasing from outside agency, value is amount actually paid by employer.
3. Where any amount is paid by employee the amount so paid shall be deducted from value so arrived.
iv. Free Domestic Servants
Actual cost to employer in respect of free services of a sweeper, a gardener, a watchman or a personal attendant as reduced by the amount paid by an employee.
v. Free or concessional educational facility
Where educational institution is maintained and owned by the employer or education is allowed in other educational institution due to his employment, the value shall be the cost of such education in a similar institution in or near the locality to the extent such cost does not exceed ₹ 1,000/- per month per child where facility is provided to children of employee and reduced by the amount paid by the employee and in other cases the value shall be the expenditure incurred by the employer.
“Salary” for the purposes of computing exemptions of Gratuity, House Rent Allowance and Leave Encashment Salary includes : a) Basic; b) Dearness Allowance (if the terms of employment provide); and c) Commission at a certain percentage of sales achieved by the employee, if paid in the course of employment. [Refer Gestetner Duplicators Pvt. Ltd. vs. CIT 117 ITR 1 (SC)].
Value of following perquisites provided to an employee or to any member of his family, by an employer is taxable in the hands of the employee. (For valuation of such perquisites – See Rule 3).
1. Use of Motor car.
2. Where employer is engaged in the carriage of passengers or goods and provides any facility for private journey free of cost or at concessional fare.
3. Any travelling, touring, accommodation and any other expenses paid by employer for any holiday availed by the employee or his family members.
4. Free food and non-alcoholic beverages provided by employer.
5. Any gift/voucher/token in lieu of which gift may be received by the employee or his family member, provided by employer.
6. Credit card provided by employer.
7. Club membership provided by employer.

Any other benefit, amenity, service, right or privilege provided by the employer.