WHAT CONSTITUTES SALARY INCOME?
"Salary" is the remuneration received by or accruing periodically to an individual for service
rendered as a result of expressed or implied contract.
Compensation or remuneration even in the following circumstances is chargeable to
Income-tax under the head 'Salaries': a) When due from the former employer or present employer in the previous year, whether
paid or not.
b) When paid or allowed in the previous year, by or on behalf of a former employer or
present employer, though not due or before it becomes due.
c) When arrears of salary are paid in the previous year by or on behalf of a former employer
or present employer, if not charged to tax in the period to which it relates.
It is, therefore, clear that apart from current years salary, even advance salary and/or
arrears of salary may be taxed in the year of receipt. More specifically and elaborately, the
Income-tax Act has stipulated that salary includes :a) Salary, including advance/arrears of salary;
b) Wages;
c) Fees;
d) Commission;
e) Pension;
f) Annuity;
g) Perquisite;
Receipts from Provident Fund chargeable to tax; Profit in lieu of or in addition to salary or
wages; Gratuity;
Contribution of employer to Recognised Provident Fund in excess of prescribed limit;
Interest on credit balance of Recognised Provident Fund in excess of notified rates;
i) Encashment of leave.
definition of 'salary' is inclusive and not exclusive.
IS RELATIONSHIP OF EMPLOYER AND EMPLOYEE NECESSARY ?
No, payment can be taxed under this section unless the relationship of employer and
employee exists between the payer and payee. The employer and employee relationship is
the relationship of a master and servant, and it distinctly differs from that existing between
a principal and agent. Primarily, the degree of control of the employer over the employee
would be a deciding factor, as the agent is generally not under the complete Control and
supervision of his principal.
That is why even the emoluments received by an Member if Parliament/ M.L.A. are not
taxable under the head "Salary" because of the absence of employer and employee
relationship.
WHAT IS THE PLACE OF ACCRUAL OF SALARY?
The golden rule is that it accrues where the service is rendered. Leave salary paid to a
person employed in India on leave to a foreign country is treated to be the arisen in India.
However, if a citizen of India service outside India and receives salary from the of India, it
would be taxable as salary to have accrued in India.
PENSIONS TO BE TAXED AS SALARY?
Pensions are taxed under the head 'Salaries'. The of standard deduction is also available on
them.
IS ADVANCE SALARY TO BE TAXED IN THE YEAR OF RECEIPT?
The I.T. Act contemplates tax on salary which is due, whether paid or not, tax is attracted
at the latest possible point of time which is the date when the salary accrues or becomes
due. However, where any salary paid in advance is assessed in the year of payment, it
cannot be taxed again when it becomes due. Similarly, if arrears of salary have been
assessed on the 'due' basis in the past, they are not liable to be taxed again when they are
paid.
WHAT IS TAX FREE SALARY AND HOW IS IT TAXED?
When the salary is paid 'tax-free' the employee has to return in his total income the gross
salary, i.e. aggregate of the net-salary received plus the amount of tax paid on his behalf by
the employer. It does not make any difference whether the tax is borne by the employer
voluntarily or under a contractual obligation.
IS SALARY PAYABLE FOR LEAVE-PERIOD TO NONRESIDENTS TAXABLE EVEN IF
LEAVE IS SPENT OUTSIDE INDIA?
Yes. The salary paid for services rendered in India is regarded as income earned in India,
so as to specifically provide that any salary payable for rest period or leave period which is
both proceeded or succeeded by service in India forms part of the service contract of
employment will also be regarded as income earned in India and so is to be taxed.
EXEMPTIONS OF INCOME
RELEVANT FOR THE HEAD "SALARIES"
It is not true that every income received by an employee from his employer is taxable. Any
income falling within any of the following paragraphs shall not be included in computing the
income from salaries: (1) The value of any travel concession or assistance received by or due to an employee
from his employer or former employer for himself and his family, in connection with his
proceeding
(a) on leave to any place in India or
(b) on retirement from service, or, after termination of service to any place in India is
exempt under clause (5) of Section 10 subject, however, to the conditions prescribed in rule
2B of the I.T. Rules, 1962.
(2) Death-cum-retirement gratuity or any other gratuity which is exempt to the extent
specified from inclusion in computing the total income.
(3) Any payment in commutation of pension received under the Civil Pension
(Commutation) Rules of the Central Government or under any similar scheme
applicable to the members of the Civil/Defense services under the Union/State/Local
Authority or a Corporation established by a Central, State or Provincial Act.
Payments in commutation of pension received under any scheme of any other
employer, exemption will be governed by the provisions of Section 10(10A) (ii).
(4) Any payment received by an employee of the Central /State Government, as cashequivalent of the leave salary in respect of the period of earned leave at his credit at the
time of his retirement on superannuation or otherwise, is exempt. In the case of other
employees it is subject to a maximum of ten month's leave. This exemption has an overall
max. limit of Rs. 2,40,000 [S.0.1015 (E) dated 27.11.97).
(5) Under Section 10(10B), the retrenchment compensation received by a workman is
exempt from income-tax subject to certain limits.
(6) Under Section 10(10C), any payment received by an employee of the notified bodies at
the time of his voluntary retirement or termination of his service, in accordance with any
scheme or schemes of voluntary retirement or in the case of public sector company, a
scheme of voluntary separation, is exempted to the extent that such amount does not
exceed five lakh rupees
(7) Any sum received under a Life Insurance Policy, including the sum allotted by way of
bonus on such policy other than any sum received under sub-section (3) of Section 80DDA.
(8) Any payment from a Provident Fund to which the Provident Funds Act, 1925 (19 of
1925), applies.
(9) Under Section 10(13AJ of the Income-tax Act, 1961, any special allowance specifically
granted to an assessee by his employer to meet expenditure incurred on payment of rent
(by whatever name called) in respect of residential accommodation occupied by the
assessee is exempt from Income-tax to the extent as may be prescribed.
(10) Under section 10(14) exemption of notified allowances is provided. The CBDT has
prescribed guidelines for the purpose of classes (i) and (ii) of Section 10(14) vide
Notification No.SO617(E) dated 7th July/ 1995 (F.No.l42/9/95TPL)which has been amended
vide Notification SO No.403(E) dated 24.4.2000 (F,No.l42/34/99-TPL).
11) Under Section 10(15)(iv)(i) of the Income-tax Act, interest payable by the Government
on deposits made by an employee of the Central Government or a State Government or a
public sector company from out of his retirement benefits, in a notified scheme, is exempt.
(12) Income by way of pension received by an individual or family pension
received by any member of the family of an individual who has been in the service of the
Central Government or State Government and has been awarded 'Param Vir Chakra" or
"Maha Vir Chakra" or "Vir Chakra" or such notified gallantry award, is exempt.
(13) Under Section 17 of the Act, exemption from tax will also be available, under
prescribed conditions, in respect of any medical treatment provided to an employee or any
member of his family or premium paid by the employer in respect of approved medical
insurance taken for his employees or reimbursement of insurance premium to the
employees for such medical insurance for the employee or his family members.
WHAT ARE PERQUISITES?
A 'perquisite' is defined in the Oxford as 'any casual emolument, or profit attached to an
office or position in addition to the salaries or wages'. In sunlit words, perquisites are the
benefits in addition to normal salary to which the employee has a right to by virtue his
employment. In simple language, 'perquisites 1 are benefits or amenities provided in kind
by the employer free of cost or at a concessional rate. Their value, to the extent these go
to reduce expenditure that the employee normally would have otherwise incurred in
obtaining these benefits and amenities, is regarded as part of taxable salary. As a golden
rule, the taxable value of perquisites in the hands of the employee, is its cost to the
employer.
However, there are specific rules for valuation of certain perquisites.
WHO IS A SPECIFIED EMPLOYEE AND WHAT PERQUISITES ARE TAXABLE IN HIS
HANDS?
The specified employees include the following:a) Director employee, whether full time or part time.
b) Employee who is beneficial owner of equity in the employer's company carrying 20% or
more voting power.
c) The employees other than those mentioned above, drawing salary in excess of Rs.
24,000 (w.e.f. 13th April 2002 this limit is Rs. 50,000) in monetary terms.
The value of any benefit or amenity granted or provided free of cost or at concessional rates
to these specified persons would be a 'perquisite' taxable in their hands.
WHAT ARE THE OTHER TAXABLE PERQUISITES?
LAW APPLICABLE, AT THE OPTION OF THE ASSESSES, UPTO 30.9.2001.
The other taxable perquisites which are taxable in a prescribed manner include the folio
wing: a) Value of rent free accommodation provided to the assessee by his employer.
b) Value of concession in rent of accommodation provided to the assessee by his employer.
c) Amount payable by an employer directly or indirectly to effect an assurance on the life of
the employee or to effect a contract for an annuity, other than payment made to
recognised provident fund etc.
d) Amount paid by an employer in respect of any obligation which otherwise would have
been payable by the employee, for example - payment of income-tax.
THE LAW APPLICABLE FOR TAXATION OF PERQUISITES w.e.f. 1.4.2001.
The definition of "perquisite" has been amended to include the value of any prescribed
fringe benefit or amenity. The fringe benefits are to be calculated in the manner prescribed
in the Income-tax Rules.
It has further been laid down that 'profits in lieu of salary shall include amounts received in
lump sum, in installments or in any manner, even prior to employment or after cessation of
employment, for the purposes of taxation.
HOW IS RENT FREE UNFURNISHED ACCOMMODATION VALUED ?
LAW APPLICABLE, AT THE OPTION OF THE ASSESSEE, UPTO 30.9.2001.
For the purposes of calculating perquisite value of rent free residential accommodation, the
employees have been classified into three categories as follows: 


Government employees.
Public Sector or Semi Government employees.
Employees in the private sector.
For the first category of employees, the of the rent free unfurnished Accommodation is
taken as the rent payable by such employee in accordance with the Government Rules for
allotment of residences to its officers.
In the case of second category of employees, the value of rent free unfurnished
accommodation is taken at 10% of the salary of the employee for the period during which it
is occupied by him. However, where the Fair Rental Value of the accommodation is less than
10% calculated above, the Assessing Officer is empowered to restrict the value of the
perquisite to such Fair Rental Value.
In the case of third category of employees, the value of rent free unfurnished
accommodation is taken 10% of salary plus excess of Fair Rental Value over 60% of salary,
if the property is located in the four metros. In any other place, the value will be taken as
10% of salary plus excess of Fair Rental Value over 50% of salary.
THE LAW APPLICABLE FOR TAXATION OF PERQUISITES w.e.f. 1.4.2001.
Under the new Rule 3, for purposes of valuation of perquisite of accommodation, employees
are of two categories only- Union. & State Govt. employees and Others.
WHAT IS THE NEW DEFINITION OF "SALARY' FOR THIS PURPOSE ?
The definition of "salary' for calculating perquisite value is the same as per earlier Rules.
The only change is that, medical allowances and reimbursement for treatment of serious
illnesses as prescribed in provision below Section 17 (2) (vi) have now been excluded.
For the purpose of calculating the perquisite, 'salary' includes basic salary or wages, D.A.,
Bonus, Commission, Fees, taxable allowances as well as payments made by the employer
(like Income-tax, electricity, gas etc.).
WHAT IS FAIR RENT?
'Fair rent' is the rent which a similar accommodation is able to get in the same locality or
the Municipal value of the accommodation, whichever is higher.
Where the accommodation is hired by the employer, it is the actual rent paid for the
accommodation.
Where it is owned by the employer, maintenance expenses of garden and salary of the
gardener, if borne by the employer, are also to be taken into account.
HOW IS RENT FREE FURNISHED ACCOMMODATION VALUED?
LAW APPLICABLE, AT THE OPTION OF THE ASSESSES, UPTO 30.9.2001.
Where the accommodation is furnished, the perquisite value of unfurnished accommodation
is increased in all the above three categories by the actual hire charges for the furniture or
10% per annum of the original cost of furniture, if it is owned by the employer.
HOW IS A RESIDENCE, PROVIDED AT CONCESSIONAL RATES, VALUED?
LAW APPLICABLE, AT THE OPTION OF THE ASSESSES, UPTO 30.9.2001.
First, the perquisite value of the accommodation is determined in the above manner as if it
was provided free of rent. From the amount so, determined, a deduction is made of the rent
actually paid by employee. The balance amount is the perquisite value to "be added to the
taxable salary.
THE LAW APPLICABLE FOR TAXATION OF PERQUISITES w.e.f. 1.4.2001.
Now, under the newly notified Rules, the value of residential accommodation provided by
the employer to the employee during the previous year relevant to the A.Y. 2002-03 shall
be determined on the basis provided
in the Table below:-
Circumstances
Where the
accommodation is
unfurnished
Where the accommodation is
furnished
(1)
(2)
(3)
(4)
1.
Where the accommodation
is provided by Union or
State Government to their
employees either holding
office or post in connection
with the affairs of Union or
State any
body or
Undertaking under the
control of such
Government on
deputation.
License fee determined
by Union or State
government in respect
of accommodation in
accordance with the
rules framed by that
government [minus] the
rent actually paid by the
employee.
The value of perquisite as per
col. (3) [plus] 10% per
annum of the cost of furniture
(including TV sets, radio sets,
refrigerators, other household
appliances, air plants or other
equipment) or if such furniture
is hired, the actual hire
charges payable for the same
[minus] charges paid or
payable for it by the
employee.
2.
Where the accommodation
is provided by any other
employer and
[i]] 10% of salary in
cities having population
exceeding four lacs as
per 1991 census;
The value of perquisite as per
col. (3) and
ii)
7.5% of salary in
other cities.
10% per annum of the cost of
furniture (including television
sets, radio sets, refrigerators,
other household appliances,
air conditioning plant or
equipment or other similar
appliances or gadgets)
or
if such furniture is hired, by
the actual hire charges
payable for the same
(a) where the
accommodation is owned
by the employer or
In respect of the period
during which the said
accommodation was
occupied by the
employee[minus] the
rent, if any actually paid
by the employee
(b) where the
accommodation is taken
Actual lease rental paid
or payable by the
[plus]
[minus]
any charges paid or payable
3.
on , on lease or rent by
the employer
employer or 10% of
salary which ever is
lower [minus] the rent,
if any, actually paid by
employee.
for the same by the employee
Where the accommodation
is provided by the
employer 4Tspecified in
SI.No. (1) or (2) above in
a hotel (except where the
employee is given such
accommodation for a
period not Exceeding in
aggregate 15 days on his
transfer from one place to
another)
Actually paid by
employee.
24% of salary paid or payable
or
the actual charge paid or
payable to such hotel,
whichever is lower, for the
period during which such
accommodation is provided
[minus] the rent, if any,
actually paid or payable by the
employee
However, nothing contained in this sub-rule would be applicable to any accommodation
located in a 'remote area 1 provided to an employee working at a mining site or an onshore
oil exploration site, or a project execution site or an accommodation provided in an offshore
site of similar nature.
Also, where on account of his transfer from one place to another, the employee is provided
with accommodation at the new place of posting while retaining the accommodation at the
other place, the value of perquisite shall be determined with reference to only one such
accommodation which has the lower value with reference to the Table above for a period
not exceeding 90 days and thereafter the value of perquisite shall be charged for both such
accommodations as per the above Table.
HAS THE SCOPE OF THE WORD "ACCOMMODATION" BEEN WIDENED ?
Yes. The scope of the word "accommodation" has been widened by clarifying that it
includes a house, flat, farm house, hotel accommodation, guest house, a caravan, mobile
home, ship etc. However, the value of any accommodation located ' in a remote area'
provided to an employee working at a mining site or an on-shore oil exploration site or a
project execution site or an accommodation provided in an offshore site will not be treated
as a perquisite. A project site for the purposes of this sub-rule means a site of project upto
the stage of its commissioning.
WHAT DOES REMOTE AREA MEAN ?
A remote area means an area located at least 40 kilometers away from a town having a
population not exceeding 20,000 as per the latest published all India census. Off-shore sites
of similar nature do not have to meet any requirement of distance.
ARE FREE EDUCATIONAL FACILITIES TAXABLE AS A PERQUISITE?
LAW APPLICABLE, AT THE OPTION OF THE ASSESSES, UPTO 30.9.2001.
The basic rule is that any expenditure incurred by the employer in providing educational
facilities to any family member of the employee normally is a perquisite.
Where the educational institution is run by the employer, the value of this perquisite is the
cost of education in a similar institution in or around the same locality.
THE LAW APPLICABLE FOR TAXATION OF PERQUISITES W.E.F. 1.4. 2001.
Under the new rules, free or concessional education shall be valued in a manner assuming
that such expenses are borne by the employee, and would cover cases where an employer
may be running, maintaining or directly or directly financing the educational institution. Any
amount paid by the employee for such facilities or services shall be deducted from the
above amount. However where such educational institution itself is maintained and owned
by the employer or where such free educational facilities are provided in any institution by
reason of his being in employment of that employer, the sub-rule shall not apply if the cost
of such education or such benefit per child does not exceed Rs. 1000 p.m.
IS PERQUISITE VALUE OF MOTOR CAR PROVIDED FOR OFFICIAL USE CHARGEABLE
TO TAX?
No. As per chart given below:Circumstances
Engine Cubic capacity
does not exceed 1.6 litres.
Engine Cubic capacity
exceeds 1.6 litres.
If motor-car is used wholly and
exclusively in the performance of
his official duties.
No value if specified
documents are maintained
by the employer.
No value if specified
documents are
maintained by the
employer.
WHAT IS PERQUISITE VALUE OF MOTOR CAR PROVIDED FOR PERSONAL USE?
LAW APPLICABLE, AT THE OPTION OF THE ASSESSES, UPTO 30.9.2001.
Usually, where the car is owned or hired by the employer, the perquisite value is
determined as the expenditure inferred by the employer on the maintenance and running of
the motor car, including emoluments, if any, of the driver and for the normal depreciation
attributable to the use of the car for the private purposes of the employee.
LAW APPLICABLE FOR TAXATION OF PERQUISITE OF MOTOR CAR W.E.F. 1.4.
2001.
Circumstances
Engine Cubic capacity
does not exceed 1.6 litres
Engine Cubic capacity exceeds 1.6
litres.
If car is used exclusively
for private or personal
purposes of the
employee or any
member of his
household & the running
and maintenance are
met or reimbursed by
the employer
Actual amount of
expenditure incurred by
the employer on the
running and maintenance
of motorcar
Actual amount of expenditure
incurred by the employer on the
running and maintenance of
motorcar
(+)
(+)
remuneration, if any,
paid by the employer to
the chauffeur
remuneration, if any, paid by the
employer to the chauffeur
(+)
(+)
depreciation of the car and
depreciation of the car
and
(-)
(-)
any amount charged by the
employer for such use by the
employee
any amount charged by
the employer for such
use by the employee
IF ON THE BASIS MENTIONED ABOVE, DETERMINATION OF THE PERQUISITE VALUE OF
CAR PRESENTS ANY PRACTICAL DIFFICULTY, WILL THE PERQUISITE BE COMPUTED?
LAW APPLICABLE, AT THE OPTION OF THE ASSESSES, UPTO 30.9.2001.
The perquisite value, will be determined as under:-
Value of perquisite per calendar month upto 30.9.01
1 . Where the car is owned or hired by the
employer and all expenses on its
maintenance and running are met or
reimbursed to assessee by employer.
employee's private or personal expenses are
borne by the employee.
Where the horsepower of
the car does not exceed 16
or the cubic capacity of the
engine does not exceed
1.88 litres
In the case
of other cars
Rs.600 upto 30.9.01
(Rs.300 upto 2.6.95)
Rs. 800 upto
30.9.01
(Rs.400 upto
2.6.95)
2.Where the car is owned or hired by the
employer but the running & maintenance
expenses for the employee's private or
personal are borne by the employee
Rs.200 upto 30.9.01
(Rs.100 upto 2.6.95)
Rs 300 upto
30.9.01
(Rs.150 upto
2.6.95)
Under the new Rules, w.e.f. 1.4.2001, the calculation of Value of Perquisite per calendar
month of car, if used partly in the performance of duties & partly for private or personal
purposes of his own or any member of his household is determined as given here-in-below:Engine Cubic capacity does not
exceed 1.6 litres.
Engine Cubic capacity exceeds
1.61t.
(i) maintenance and
running are met or
reimbursed by the
employer.
Rs.1200 (plus Rs.600, if chauffeur
is also provided to run the car).
Rs.1600 (plus Rs.600, if
chauffeur is also provided to
run the car).
(ii) maintenance
and running for
such private or
personal use are
fully met by the
assessee
Rs.400 (plus Rs. 600, if chauffeur is
provided by the employer to run the
car).
Rs.600 (plus Rs.600, if
chauffeur is also provided to
run the car).
Circumstances
HOW WILL THE PERQUISITE BE COMPUTED WHERE THE EMPLOYEE OWNS A
MOTOR CAR BUT THE ACTUAL RUNNING & MAINTENANCE CHARGES (INC1UDING
REMUNERATION OF THE CHAUFFEUR, IF ANY) ARE MET OR REIMBURSED TO HIM
BY THE EMPLOYER?
The perquisite value in such case will be determined as under:Circumstances
Engine Cubic capacity
does not exceed 1.6 lt
Engine Cubic capacity
exceeds 1.6 It.
(i) such reimbursement is for the
use of the vehicle wholly and
exclusively for official purposes.
No value if specified
documents are
maintained by the
employer.
No value if specified
documents are maintained
by the employer.
(ii) such reimbursement is for the
use of the vehicle partly for
official purposes & partly for
personal or private purposes of
the employee or any member of
his household.
Subject to the provisions
contained in clause (B) of
this sub-rule, the actual
amount of expenditure
incurred by the employer
Subject to the provisions
contained in clause (B) of
this sub-rule, the actual
amount of expenditure
incurred by the employer
(-)
(-)
Rs.1200 (plus Rs.600, if
Rs. 1600 (plus Rs.600, if
chauffeur is also provided
by the employer to run
the car).
chauffeur is also provided
by the employer to run
the car).
HOW WILL THE PERQUISITE BE COMPUTED WHERE THE EMPLOYEE OWNS ANY
OTHER AUTOMOTIVE CONVEYANCE BUT THE ACTUAL RUNNING MAINTENANCE
CHARGES ARE MET OR REIMBURSED TO HIM BY THE EMPLOYER?
The perquisite value, will be determined as under:-
Circumstances
Cubic capacity of engine
does not exceed 1.6 litres.
Engine Cubic cap. exceeds 1.6
litres
(i) where such
reimbursement is for the
use of the vehicle wholly &
exclusively for official
purposes. No value if
specified documents are
maintained by the
employer. Not applicable
No value if specified
documents are maintained
by the employer.
Not applicable
(ii) such reimbursement is
for the use of the vehicle
partly for official purposes
and partly for personal or
private purposes of the
employee.
Subject maintenance of specified documents by the
employer, the actual amount of expenditure incurred by the
employer (-) Rs. 600.
HOW IS PERQUISITE VALUE CALCULATED FOR USE OF CAR FOR PRIVATE
PURPOSES, PROVIDED AT CONCESSIONAL RATES?
As per the old and the new rules, firstly, the value of the perquisite has to be arrived at as
given above and then from the amount so determined, deduction is made from the actual
amount paid by the employee for private use of the car. The balance is the perquisite value
in this case.
WHAT IS THE LAW APPLICABLE W.E.F. 1.4.2001 WHERE SECOND AND
ADDITIONAL CARS ARE PROVIDED BY EMPLOYER?
Such other cars shall be deemed to be for personal use and the value of perquisite shall be
computed accordingly. Where fuel and upkeep cost of the employees, car is borne or
reimbursed by the employer, the amount reasonably attributable to business use is not to
be charged as perquisite. For this, user details in the form of log books; odometer readings
etc. should be maintained.
AS PER NEW RULES WHAT IS THE DOCUMENTATION THAT NEEDS TO BE
MAINTAINED FOR CLAIMING HIGHER AMOUNT OF OFFICIAL USE IN RESPECT OF
CARS?
For claiming higher amount of official use in respect of reimbursement of car expenses or
wholly official use of car provided by an employer, the following details and documents need
to be maintained:i) the employer has maintained complete details of journeys undertaken for official purpose
which may include date of journey, destination, mileage and the amount of expenditure
incurred thereon;
ii) the employee gives a certificate that the expenditure on claimed trips was incurred
wholly and exclusively for the performance of his official duty;
iii) the supervising authority of the employee, wherever applicable, gives a certificate to the
effect that the expenditure was incurred wholly and exclusively for the performance of
official duties.
ARE THE RULES OF VALUATION FOR EMPLOYEE OWNED CARS BE TAKEN TO APPLY
TO CONVEYANCE ALLOWANCE REGULARLY PAID OR PAYABLE TO THE EMPLOYEE?
No, these rules of valuation for employee owned cars should not be taken to apply to
conveyance allowance regularly paid or payable to the employee under terms of
employment or otherwise. The conveyance allowance is a cash disbursement and is to be
taxed separately as an allowance subject to the provisions contained in Section 10(14). The
present rules provide for the computation of value of perquisite where the expenses on the
running or maintenance of employee owned car is met or reimbursed by. the employer.
WHAT IS THE MOST IMPORTANT CHANGE TO BE KEPT IN MIND WHILE
CALCULATING THE PERQUISITE VALUE OF CARS?
One of the most important changes incorporated is in the cubic capacities of motorcars.
Previously, the cubic capacities of small motorcars was specified as not exceeding 1.88 litres
whereas now the limit is 1.6 litres.
WHAT IS PERQUISITE VALUE OF FREE SUPPLY OF GAS, ELECTRICITY AND WATER
FOR HOUSE-HOLD CONSUMPTION?
LAW APPLICABLE, AT THE OPTION OF THE ASSESSEE, UPTO 30.9.2001.
In case the supply is made from resources owned by the employer, the perquisite value is
'Nil'. Where the supply is taken from third party, the perquisite value would be the expenses
incurred by the employer.
In case the supply is partly for official and partly for private purposes, the perquisite value is
its actual cost to the employer or 6.25% of salary, whichever is Less,
THE LAW APPLICABLE FOR TAXATION OF PERQUISITES W.E.F. 1.4. 2001.
For free supply of gas, electricity and water for household consumption the old rules already
provide that the amount paid by the employer to the agency supplying the amenity shall be
the value of perquisite. However, when the supply is made from employer's own resources,
the value of perquisite was taken as Nil. The separate provision in the old rules of valuation
at 6.25% of salary of the taxpayer for part official use is discontinued. Under the new rules
even where the supply is made from the employer's own resources, the manufacturing cost
per unit incurred by the employer would be the value of perquisite. Any amount paid by the
employee for such facilities or services is reduced from this amount.
WHAT IS THE VALUE OF PERQUISITE OF HOUSEHOLD SERVANTS PROVIDED BY
THE EMPLOYER?
LAW APPLICABLE, AT THE OPTION OF THE ASSESSES, OTTO 30.9.2001.
The perquisite value w.e.f. 2.6.95 is taxed as:When employer reimburses salary of
servant engaged by employee
When servant is
provided by employer
1. Gardener, sweeper
and watchman.
100% salary taxable.
Rs. 120 p.m. Per
person.
2. Any other servant.
100% salary taxable.
100% salary taxable.
THE LAW APPLICABLE FOR TAXATION OF PERQUISITES W.E.F, 1.4. 2001.
Value of free service of all personal attendants including a sweeper, gardener, or watchman
is to be at actual cost to the employer. Where attendant(s) is provided at the residence of
employee, full cost will be taxed as perquisite in the hands of employee irrespective of
degree of personal service rendered to him. Any amount paid by the employee for such
facilities shall be reduced from the above amount.
IF THE EMPLOYER GIVES OPTION TO ITS EMPLOYEE 'TO BUY ITS SHARES, IS IT A
TAXABLE PERQUISITE?
Prior to 1.4.2001, stock options were taxed at two stages i.e., as perquisite (on the amount
representing the difference between the exercise price and the fair market value on the date
of exercise), and as capital gains.
With effect from 1.4.2001 (relevant to assessment year 2001-2002) onward, stock options
issued as per guidelines of the Central Government are to be taxed only once, at the time of
sale, as capital gains. In cases, where perquisite has been assessed with reference to
exercise of the option by the employee under Section 17(2), the fair market value at the
time of exercise of the option shall be the cost of acquisition of share for working out the
capital gains. The relevant guidelines of the Central Government have been issued vide
Notification No.l021(E) dt. 1.10.2001. Stock options not in conformity with the above
guidelines-(non-qualified stock options) shall continue to be taxed at both the stages.
WHAT IS THE PERQUISITE FOR USE BY THE EMPLOYEE OF AN ASSET OWNED BY
THE EMPLOYER?
This perquisite is to be charged at the rate of 10% of the original cost of the asset as
reduced by any charges paid for such use. However, Computers and laptops are exempt
Further, the value of perquisite for an asset used for income for more than ten years would
be taken as Nil.
IS AN AMOUNT SPENT ON MEMBERSHIP FEE BY THE EMPLOYER ON THE
MEMBERSHIP OF THE EMPLOYEE IN A PROFESSIONAL INSTITUTION A TAXABLE
PERQUISITE?
Yes. It is a taxable perquisite.
AS PER NEW RULES WHAT IS THE POSITION OF CLUB EXPENSES BORNE BY THE
EMPLOYER?
Club expenses of employees borne by employers are already charged as perquisite by virtue
of Section 17(2)(iv). To formalize the issue, now it has been specified that annual and
periodical club fees paid by the employer is chargeable as a perquisite. However to ensure
that basic facilities for the health and recreation of employees are not hit, health clubs,
sports facilities etc provided uniformly to all classes of employees by the employer at the
employer's premises are exempt. Where such expenses on entertainment including meals
are for purposes of business and proper records for the same are maintained, no perquisite
would arise.
AS PER NEW RULES WHAT IS THE POSITION OF INITIAL ONE TIME DEPOSITS OR
FEES FOR CLUB MEMBERSHIPS?
The initial one time deposits or fees for corporate or institutional membership, where the
benefit does not remain with a particular employee after cessation of employment, are
exempt.
AS PER NEW RULES WHAT IS THE POSITION OF CREDIT CARD EXPENSES BORNE
BY EMPLOYERS?
Credit card expenses of employees both business and personal, are often borne by
employers. Such credit card payments would ordinarily be chargeable to tax as a perquisite.
However, these expenses are often incurred to entertain customers and clients for the
purposes of business. Therefore where such expenses on entertainment including meals are
for purposes of business and proper records for the same are maintained no perquisite
would arise.
AS PER NEW RULES WHAT DOCUMENTATION IS TO BE MAINTAINED BY
EMPLOYERS FOR CREDIT CARD / CLUB EXPENSES BORNE BY THE EMPLOYERS TO
BE EXEMPT IN THE HANDS OF THE EMPLOYEE?
For credit card and club expenses to be exempt for business purposes, the following
documentation needs to be maintained:
(a) Complete details in respect of such expenditure maintained by the
including the date of expenditure and the nature of expenditure;
employer
(b) It is certified by the employee that such expenditure was incurred wholly
and exclusively for the performance of official duty;
(c) Supervising authority of the employee, wherever applicable, gives a certificate for such
expenditure to the effect that the same was incurred wholly and exclusively for the
performance of official duties;
(d) Where an employee incurs expenditure on entertainment and claims the
same to have been incurred wholly and exclusively in the performance of his duties,
details of such entertainment expenses including the nature and purpose of
entertainment and
persons entertained.
SOME VEHICLE IS SOLD BY EMPLOYER TO ITS EMPLOYEE, IS IT A TAXABLE
PERQUISITE?
LAW APPLICABLE, AT THE OPTION OF THE ASSESSES, UPTO.9.2001. is a taxable
perquisite only when the vehicle is sold below the market price.
The difference between
the target price and the sale price would be the taxable
THE LAW APPLICABLE FOR TAXATION OF PERQUISITES W.E.F. 1.4. 2001.
Often an employee or member of his household benefits from the transfer of movable asset
(not being shares or Securities) at no cost or at a cost less than its market .Value from the
employer. The difference between the cost of the movable asset (not being shares or
securities) and the sum, if any, paid by the employee, Shall be taken as the value of
perquisite. In case of a movable asset, which has already been put to use, the original cost
shall be reduced by a sum of 10% of such original cost for every completed year of use of
the asset.
AS PER NEW RULES DO ELECTRONIC GADGETS GET SPECIAL TREATMENT IF SOLD
TO EMPLOYEE?
Yes. Owing to a higher degree of obsolescence, in case of computers and electronic
gadgets, the value of perquisite shall be worked out by reducing 50% of the actual cost by
the reducing balance method for each completed year of use. Electronic gadgets in this case
means data storage and handling devices like computer, digital diaries and printers. They do
not include household appliance (i.e. white goods) like washing machines, microwave
ovens, mixers, hot plates, ovens etc. In case of cars, similarly, the value of perquisite shall
be worked out by reducing 20% of its actual cost by the reducing balance method for each
completed year of use.
ARE GIFTS MADE IN KIND BY EMPLOYER TAXABLE PERQUISITES?
LAW APPLICABLE, AT THE OPTION OF THE ASSESSES, UPTO 30.9.2001.
Yes. The perquisite value would be the market price of the gifted article.
THE LAW APPLICABLE FOR TAXATION OF PERQUISITES W.E.F. 1.4. 2001.
It is customary in India, as it is in other parts of the world, to provide presents directly or
indirectly in the form of vouchers or tokens to employees on social and religious occasions
like Diwali, Christmas, New Year, the anniversary of the organization etc. Such gifts upto
Rs.5000 in the aggregate per annum would be exempt, beyond Rs.5,000 it would be taxed
as a perquisite. However, gifts made in cash or convertible into cash, like gift cheques etc.
do not fall in the purview of this rule.
AS PER NEW RULES WHAT IS THE PERQUISITE IF THE EMPLOYEE AVAILS OF FREE
OR CONCESSIONAL JOURNEYS IN THE CONVEYANCE(S) OWNED BY THE
EMPLOYER'S BUSINESS FOR TRANSPORTATION?
Under the old rules where an employee avails of free or concessional journeys in
conveyance owned by the employer's undertaking for the purpose of transport of
passengers or goods, the value of perquisite was taken as Nil. However, under the new
rules the value at which such benefit or amenity is offered by such undertaking to the
public, the value of perquisite shall now be taken as such value as reduced by any amount
actually paid by the employee. The conveyance may be owned, leased or made available by
any other arrangement by the undertaking.
However Journey tickets for leave travel, tours and transfers which are already exempt
under Sections 10(5) and 10(14) would continue to be exempt
AS PER NEW RULES WHAT IS THE PERQUISITE IF EMPLOYEE AVAILS OF INTEREST
FREE OR CONCESSIONAL LOANS?
It is common practice to provide interest free or concessional loans to employees. The value
of such perquisite would be the excess of interest payable at prescribed interest rate over
interest, if any, actually paid by the employee.
The prescribed interest rate now is 10% p.a. for loans for housing/conveyance and 13%
p.a. for other loans.
Perquisite value would be calculated on the basis of the maximum outstanding monthly
balance by the simple interest method. Such housing or conveyance loans must be for
'acquiring capital assets' i.e., house or conveyance, as the case may be, and not for repairs
thereof, however extensive they may be.
For valuing perquisites under this rule, any other method of calculation and adjustment
otherwise adopted by the employer shall not be recognised for purposes of this rule.
IS THE PERQUISITE AVAILING OF INTEREST FREE OR CONCESSIONAL LOANS
EXEMPT IN ANY CASE?
Yes, small loans upto Rs.20,000 in the aggregate are exempt. Loans for medical treatment
specified in Rule 3A are also exempt, provided the amount of loan for medical
reimbursement is not reimbursed under any medical insurance scheme. Where any medical
insurance reimbursement is received, the perquisite value at normal rates shall be charged
from the date of reimbursement on the amount reimbursed, but not repaid against the
outstanding loan taken specifically for this purpose.
WHAT IS THE POSITION OF LOANS OUTSTANDING AS ON 1 st APRIL, 2001?
It has been specifically clarified that the above sub-rule shall also apply to loans outstanding
as on 1 st April, 2001, (if the new rule is applied from that date) or 1 st October, 2001 (if
the new rule is applied from that date).
AS PER NEW RULES WHAT IS THE PERQUISITE IF EMPLOYEE IS PROVIDED WITH
VACATION AND HOLIDAY FACILITIES?
The value of such perquisite shall be the expenditure incurred by the employer. This would
also apply to official tours extended as a vacation and family members accompanying
taxpayers on official tours. However leave travel as per Section 10(5) and enjoyment of
holiday home facilities available uniformly to all classes of employees would remain exempt.
AS PER NEW RULES WHAT IS THE PERQUISITE IF EMPLOYEE IS PROVIDED WITH
FREE MEALS?
The scheme of free meals as a staff welfare measure had been recognized and was
admissible upto Rs.35 for each meal. The new rule does not treat as perquisite free meals if
the cost per meal does not exceed Rs.50
Where any amount is recovered from the employee, such amount shall be reduced from the
value of perquisite. Such free or subsidised meal should, however, be provided at office
premises or through non-transferable vouchers meant for only meals during working hours.
Tea or similar non-alcoholic beverages and snacks - in the form of light refreshments during
working hours are not charged as perquisite.
Also, meals in, remote areas as prescribed and similar off-shore sites as specified, shall be
exempt.
However, provision of free meals by the employer in excess of Rs.50 would be treated as
perquisite, as reduced by recoveries made from the employee.
AS PER NEW RULES WHAT WOULD BE THE PERQUISITE OF A BENEFIT OR AMENITY
NOT INCLUDED IN THE RULES?
A benefit or amenity not included in the rules shall be valued at the cost to the employer
where the employer pays for the benefit or amenity. Otherwise, it would be valued at the
amount the employee would pay to acquire such benefit or amenity from the market. But,
the benefit of conveyance to and from residence to place of work, periodicals and journals
required for discharge of work and expenses on telephones, including a mobile phone, shall
not be perquisite.
THE NEW RULES HAVE BEEN MADE EFFECTIVE FROM 1.4.2001 ALTHOUGH THE
WERE ONLY NOTIFIED THROUGH NOTIFICATION NO. 313 DATED 25.9.2001. IS
THIS IS NOT INEQUITABLE?
No. While this Rule comes into force with effect from the 1 st day of April, 2001 it has been
provided that the employee may, at his option, compute the value of perquisites made
available to him or any member of his household for the period beginning on 1 st day of
April, 2001 and ending on 30th day of September, 2001 in accordance with the Rules, as
they stood prior to this amendment. Therefore, the employer has to obtain a declaration
from each employee as to the option he wants to follow for purposes of tax deduction at
source.
However, administrative circulars and instructions relating to perquisites failing under the
purview of Rule 3 issued before the adoption of the new rules, shall stand superseded or
modified, as the case may be.
CAN AN EMPLOYEE EXERCISE OPTION FOR USING THE OLD OR NEW RULES FOR
THE PERIOD DIFFERENTLY IN RESPECT OF DIFFERENT PERQUISITES?
No. It should be noted that the option to the taxpayer of using the old or new rules for the
period specified above shall be applied uniformly in respect of all perquisites, in case of a
particular taxpayer. In other words, one cannot selectively value a particular perquisite by
the old rule and another one by the new rule.
WHAT ARE THE CONDITIONS FOR MEDICAL FACILITIES TO QUALIFY AS TAX FREE
PERQUISITES?
Section 17 of the IT Act, exempts from tax :(a) The value of any medical treatment provided to an employee or any member of his
family, in any hospital maintained by the employer;
(b) Any sum paid by the employer in respect of any expenditure actually
employee on his medical treatment or of any member of his family:
incurred
by
(i) In ally hospital the Government or of any local Authority or any other hospital approved
for the purposes of medical treatment of its employees;
(ii) In respect of the prescribed diseases or ailments, in any hospital approved by the Chief
Commissioner :
Provided that, in a case failing in sub-clause (ii), the employee shall attach with his return of
income a hospital certificate specifying the disease 85 hospital Receipt for amount paid.
(c) Premium paid by the employer in respect of approved medical insurance taken for his
employees or reimbursement of insurance premium to employees for medical insurance for
themselves/family members.
(d) Reimbursement by the employer, of the amount spent by an employee in obtaining
medical treatment for himself or any member of his family from any doctor, max.
aggregate Rs. 15,000 in an year.
(e) As regards medical treatment abroad, the actual expenditure on stay and treatment
abroad of the employee or any member of his family, or, on stay abroad of one attendant
who accompanies the patient, in connection with such treatment, will be excluded from
perquisites to the extent permitted by the Reserve Bank of India. As regards the
expenditure incurred on travel abroad by the patient/attendant, it shall be excluded from
perquisites only if the employee's gross total income, as computed before including the said
expenditure, does not exceed Rs.2 lakhs.
WHAT ARE ALLOWANCES?
An allowance is defined as a fixed amount of money given periodically in addition to the
salary for the purpose of meeting some specific requirements connected with the service
rendered by the employee or by way of compensation for some unusual conditions of
employment. It is taxable on due/accrued basis whether it is paid in addition to the salary
or in lieu thereon.
The basic golden rule is that all such allowances are taxable as these are paid because of
direct relationship between an employer and employee. However, there are exceptions to
this rule. Some of them are given below :Clause (14) of Section 10 provides for exemption of the following allowances: (a) Any special allowances or benefit granted to an employee to meet the expenses incurred
in the performance of his duties.
(b) Any allowance granted to an assessee either to meet his personal expenses at the place
of his posting or at the place he ordinarily resides or to compensate him for the increased
cost of living.
However, the allowance referred to in (b) above should not be in the nature of a personal
allowance granted to the assessee to remunerate or relating to his office or employment
unless such allowance is related to his place of posting or residence.
Earlier the exempt allowances were being specified through notifications issued by the
Central Government. With effect from 1.7.95, the details of allowances exempt is given in
the Income Tax Rules.
The following allowances are exempt to the extent and subject to the conditions indicated in
the Rules :a) Any allowance for meeting the cost of travel on tour or on transfer.
b) Any allowance, whether granted on tour or for the period of journey in connection with
transfer (including any sum paid in connection with transfer, packing and transportation of
personal effects on such transfer).
c) Any allowance granted to meet the expenditure incurred on conveyance in performance
of duties of an office/employment of profit. Provided free conveyance is not provided by the
employer.
d) Any allowance granted to meet the expenditure incurred on a helper where he is
engaged for the performance of duties of any Office/employment of profit.
Any allowance granted for encouraging academic research in educational and research
institutions.
Any allowance for Purchase or maintenance of uniform for wear during the performance of
duties of an office/employment of profit.
ARE THE ABOVE ALLOWANCES TO BE ACTUALLY SPENT TO AVAIL OF THE EXEMPTION?
Yes, certainly. Any allowance (mentioned above) received but not actually spent will be
taxable.
If ARE THERE ANY ALLOWANCES, WHICH ARE ONLY : exempt when received at a
particular place(s) ;pr area(s)? and do they have any upper ceilings : for exemption?
For the new amended Rules contain other allowances also .which are exempt (subject to
ceilings) in particular area(s) only. These special allowances are :i) Any special Compensatory Allowance, in the nature of Composite Hill Compensatory
allowance or High Altitude, Allowance or Uncongenial Climate Allowance or Snow Bound
Area Allowance or Avalanche Allowance;
ii) Any special Compensatory Allowance given which is in the nature of border area
allowance or remote area allowance or difficult area allowance or disturbed area allowance;
ii) Tribal Area Allowance;
iii) Allowance granted to an employee working in any transport system to meet his personal
expenditure during his duty performed in the course of running of such transport from one
place to another place, provided that such employee is not in receipt of daily allowance;
iv) Children Education Allowance;
v) Any allowance granted to an employee to meet the hostel expenditure of his child;
vi) Compensatory Field Area Allowance;
vii) Compensatory Modified Field Area Allowance;
viii) Any Special allowance, in the nature of counter insurgency allowance granted to the
members of armed forces operating in areas from their permanent locations for a period of
more than 30 days.
It may be noted that the Dearness Allowance and City Compensatory Allowance granted to
an employee are not covered by the Amended Rules. So, these allowances will clearly be
part of income and will have to be taken into account in the computation of income for the
purposes of deduction of tax at source.
The reimbursement of tuition fee is also not exempt.The transport allowance granted to an
employee to meet his expenditure for the purpose of commuting between the place of his
residence and the place of duty is exempt to the extent of Rs. 800 per month vide
Notification S.O.No. 395(E) dated 13.5.98.
HOUSE RENT ALLOWANCE
The exemption from tax with regard to HRA is restricted to the least of the following
amounts:(i) Actual amount of H.R.A.
The amount by which actual rent paid by the employee exceeds 10% of his salary; and
ii) 50% of salary if the rented house is situated at Delhi, Bombay, Kolkata or Chennai, or
40% of the salary in the case of other cities.
In simpler terms, the whole of H.R.A. is exempt from tax only if it is not in excess of 50% in
the 4 metropolitan cities, and 40% in the case of other cities, and further if the rent paid is
more than the total of H.R.A and 10% of the "salary. Otherwise, the excess has to be added
to the taxable income.
IN THE CASE OF EMPLOYEE RESIDING IN HIS OWN HOUSE, IS THE H.R.A EXEMPT FROM
TAX ?
No. As he is not paying any rent, so exemption from tax with regard to H.R.A. is restricted
to 'Nil'. IF AN EMPLOYEE IS RESIDING ALONG WITH HIS PARENTS IN A HOUSE
FOR WHICH NO RENT IS PAID BY HIM, WILL H.R.A. RECEIVED BY HIM BE TAXABLE?
Yes. The entire H.R.A. would be taxable f6r the same reason as given above. FOR THIS
PURPOSE WHAT DOES "SALARY" MEAN?
"Salary" includes dearness allowance, if the terms of employment so provide, but excludes
all other allowances and perquisites.
IS RENT RECEIPT COMPULSORILY GIVEN TO DDO?
No. It has been decided as an administrative measure that salaried employees drawing
house rent allowance upto Rs.3,000 pm will be exempted from giving rent receipt to DDO.
But in the regular assessment of the employee, the Assessing Officer is free to make
enquiry or request proof of payment of rent by assessee.
ARE THERE ANY OTHER ALLOWANCES WHICH GET SPECIAL TREATMENT UNDER THE
I.T. ACT ? Yes. There are other payments e.g. leave travel concession etc., made by the
employer which get special tax treatment.
LEAVE TRAVEL CONCESSION
WHAT ARE THE LIMITS OF EXEMPTION IN L.T.C. is granted to an employee in connection
with the journey on leave by him or his family. It is exempt from income tax within certain
limits as under : (a) Where journey is performed by rail; railway-fare in Second AC class by shortest route to
destination.
(b) Where places of origin and destination are connected by rail but the journey is
performed by any other mode then Second AC class fare by shortest route to the place of
destination.
(c) Where place of origin of journey and destination, or part thereof, are not connected by
rail and journey is performed by any other transport; then
(i) If a recognised public transport system exists between such places the first class or
deluxe class fare of such transport by shortest route, or,
(ii) If in other case, Second AC class fare for the distance of the journey by the shortest
route, as if the journey has been performed by rail.
Exemption will, in no case exceed actual expenditure incurred in the performance of
journey.
Leave Travel Concession Rules have been amended on the recommendation of the Fifth Pay
Commission to extend the facility of travel by air economy Y- Class to certain categories of
employees of the Central Government with effect from 1st October, 1997.
Consequently, where the journey is performed on or after 1st October, 1997 by air, an
amount not exceeding the air economy fare of the National Carrier by the shortest route to
the place of destination.
Also, where the entitlement was previously for air-conditioned Second Class Rail fare, it has
been upgraded to air-conditioned First Class Rail fare. [l.T. (First Amendment) Rules 1998,
O.O.I. Gazette Notification No. S.O. 34(E) dt.
12th Jan. 1998; CBDTF.No. 142/85/97-TPL No. 105021].
WILL THIS CHANGE APPLY ONLY TO GOVERNMENT EMPLOYEES OR DOES IT APPLY
ALSO TO EMPLOYEES OF OTHER SECTORS ?
The change applies to all employees.
HOW MANY TIMES CAN EXEMPTION BE CLAIMED ?
The assessee can claim exemption in respect of two such journey(s) in a block of 4 years.
For this purpose, the first block of 4 years was calendar year 1986-89. For a block of 4
years, the journey performed in the first year following that block year is also eligible for
exemption. Also, such journey will not be taken into account for determining the tax
exemption for the succeeding block.
TO QUALIFY FOR EXEMPTION IS IT NECESSARY TO PERFORM ACTUAL JOURNEY ?
Yes, certainty. In case the L.T.C. is encashed without actually performing the journey the
entire amount received by the employee would be taxed in his hands.
WHAT IS THE DEFINITION OF FAMILY FOR THIS PURPOSE?
For this purpose "family" means:(i) The spouse and children of the individual; and
(ii) The parents, brothers and sisters of the individual or any of them, wholly or mainly
dependent on the individual.
HAS ANY CHANGE BEEN MADE IN RULES FOR EXEMPTION OF L.T.C. TO DENY THIS
BENEFIT TO LARGE FAMILIES?
Yes. Exemption of L.T.C. shall not be available to more than two surviving children of an
individual after 1 st October 1998. However, this shall not apply in respect of children born
before 1.10.98 and also in case of multiple births after one child. If an employee has before
1.10.98 even five children or more, exemption would still be available to all children.
However, if an employee begets a third child after 1.10.1998, the L.T.C. for the third child
will not be exempt.
PAYMENTS OF PROFIT-IN-LIEU OF SALARY
The definition of PROFIT-IN-LIEU OF SALARY is an inclusive one and includes the
following:(a) The amount of compensation due to or received by an assessee from his employ Or
former employee at or Inconnection with the termination/or the modifications of the terms
and conditions if employment.
(b) Contribution by employer to employee's Provident Fund in excess of 12% of salary of
the employee.
(c) Interest credited on the Provident Fund balance of the employee in so far as it exceeds
the rate fixed by the Central Government.
TAXATION OF AMOUNTS RECEIVED UNDER V.R.S.
IS COMPENSATION RECEIVER IN CONNECTION WITH THE TERMINATION OF
EMPLOYMENT TAXABLE ?
Normally, it is taxable as profit-in-lieu-of-salary. However, Under the existing provisions
contained in clause (IOC) of section 10, any amount received by an employee of a public
sector company- any other company or an authority established under a Central, State or
Provincial Act or a local authority or a co-operative society or a university or an Indian
Institute of Technology or a notified institute of management, at the time of his voluntary
retirement is not included in computing his total income. The exemption is available for
amounts upto rupees five lakhs but only if the payment is in accordance with a voluntary
retirement or separation scheme as per the prescribed guidelines.
IS COMPENSATION RECEIVED BY A DIRECTOR UNDER INDUSTRIAL DISPUTE ACT,
EXEMPT?
Retrenchment compensation received by the Director under the Industrial Dispute Act or
under such similar Acts, Laws, Rules etc. to the extent the compensation does not exceed,
the amount payable u/s 25F(b) of the Industrial Disputes Act, 1947. It, therefore, means
that the compensation should not exceed the amount calculated @15 days wages for every
completed year of continuous service, subject to a max of Rs. 50,000 . The Central
Government has the powers to enhance the ceiling/limit of such compensation or to relax
the limit in deserving cases.
DOES NOT THIS EXEMPTION EXTEND TO COMPENSATION PAID BY NEW
MANAGEMENT?
This exemption also is extended to the compensation paid at the time of transfer of the
Undertaking by the new owner or management resulting in interruption of service or
modification in the terms of service. The exemption also extends to the compensation paid
at time of closing down of an industrial undertaking.
HAS THE EXEMPTION OF AMOUNT RECEIVED UNDER V.R.S NOW BEEN EXTENDED
TO CENTRAL AND STATE GOVERNMENT EMPLOYEES?
Yes. The exemption of amount received under V.R.S. is extended to employees of the
Central Government w.e.f. Assessment Year 2002-2003 and State Government employees
w.e.f. Assessment Year 2001-2002.
IF THIS EXEMPTION HAS BEEN ALLOWED TO ANY EMPLOYEE FOR ANY
ASSESSMENT YEAR CAN IT BE ALLOWED IN ANOTHER ASSESSMENT YEAR ALSO?
No. It shall be allowed to him only once in a life time.
'GOLDEN HANDSHAKE'
WHAT ARE THE GUIDELINES FOR EXEMPTION FROM TAX OF COMPENSATION
RECEIVED OR 'GOLDEN HANDSHAKE 1 GIVEN TO AN EMPLOYEE UNDER A SCHEME
OF VOLUNTARY RETIREMENT?
The guidelines for bestowing the exemption from tax on the Golden Handshake are given
herein below:-
1. VRS applies to an employee of the company who has completed 10 years of service
or 40 years
2. It applies to all employees and executives (excluding directors).
3. It has been drawn to result in overall reduction in the existing strength of the
employees of the company.
4. Vacancy caused by the VRS is not to be filled up.
5. The retiring employee is not to be employed in other business belonging to the same
6.
7.
management.
The amount should not exceed Rs. 5 lacs.
The employee has not Availed in the past the benefit of any other voluntary scheme.
The above guidelines are to be strictly followed, and in case, the payment on account of
voluntary retirements are not strictly made as per the prescribed guidelines, the payment
will not be exempt.
IN THE AMOUNT OF GOLDEN HANDSHAKE, WHETHER THE ENTIRE AMOUNT
RECEIVABLE OR ONLY THE EXCESS OF THE AMOUNT ABOVE Rs. 5 LACS, IS TO BE
SUBJECTED TO INCOME-TAX ?
Only the amount representing the excess and above the limit of Rs. 5 lacs is to be subjected
to Income-tax.
IS THE 'GOLDEN HANDSHAKE' RECEIVABLE BY AN EMPLOYEE OF A COMPANY
WHICH HAS BEEN SET UP LESS THAN 10 YEARS AGO, EXEMPT?
No. The scheme is applicable to the employees who have completed 10 years of service with
a company, so it will not be exempt.
CAN SUCH SCHEME ONLY BE DRAWN BY LOSS MAKING COMPANIES?
The guidelines require that the scheme should result in overall reduction in the existing
strength of the employees of the company. Therefore, the Scheme can be drawn even by
the profit making companies.
WHETHER INCOME TAX EXEMPTION OF GOLDEN HANDSHAKE IS AVAILABLE WHEN
THE AMOUNT PAYABLE IS IN ADDITION TO NORMAL RETIREMENT BENEFITS LIKE
P.F., GRATUITY, PENSION ETC. UNDER THE TERMS GOVERNING EMPLOYMENT?
Yes. The provisions governing exemption of Golden Handshake are separate from the
provisions which govern taxation of provident Fund, Gratuity, Pension etc.
WHETHER ANY TDS HAS TO BE MADE FROM GOLDEN HANDSHAKE?
No. If all specified conditions are satisfied the employer need not deduct the TDS from the
Golden Handshake.
HAS THERE BEEN ANY REGENT CHANGE IN THE GOLDEN HANDSHAKE SCHEME?
Yes, w.e.f. 1.4.2001, the words "termination of his service" have been added to the word
Voluntary retirement' and in the case of a public sector company 'a scheme of voluntary
separation' have been added.
ENCASHMENT OP EARNED LEAVE
As the name suggests, it is the amount received by the employee for the leave period not
availed by him.
IS ENCASHMENT OF EARNED LEAVE EXEMPT AT THE TIME OF RETIREMENT?
Yes, subject to certain limits, if it relates to a Government employee his retirement from
service on superannuation or otherwise, it is fully exempt.
In the case of other employees, the exemption from Income-tax is in respect of encashment
of upto the maximum of 8 months earned leave calculated at the average of Jast 10
month's salary. There is also maximum monetary limit which is Rs. 1,35,360 for a person
retiring on or after 1.7.95.
This limit is applied on the aggregate amount of such payments received from, two or more
employers, whether received in the same year or in different years.
IS ENCASHMENT OF LEAVE DURING THE EMPLOYMENT ALSO EXEMPT?
No. Encashment of leave at any time during the employment is taxable in full.
TAXATION OF COMMUTATION OF PENSION
WHAT IS THE AMOUNT OF EXEMPTION OF COMMUTATION OF PENSION?
In the case of Government employees the entire amount is exempt from tax. However, in
the case of non-Government employees the maximum amount exempt from tax is restricted
to the commuted value of I/3rd of pension where the employee also received gratuity.
Commuted value of 50% of pension is, however, exempt.
TAXATION OF GRATUITY AT RETIREMENT
WHAT IS THE AMOUNT OF EXEMPTION OF GRATUITY RECEIVED AT THE TIME OF
RETIREMENT?
Gratuity is a payment in return of service and it is taxable as contractual salary. However,
the I. T. Act exempts gratuity from Income-tax, subject to limits.
In case of Government employees, the whole of the death-cum-retirement gratuity is
exempt from tax.
In the case of Industrial Workers, any gratuity received by an employee drawing monthly
salary (not exceeding Rs.2,500) only the feast is exempt:(a) 5 days salary (7 days in the case of seasonal employment) for each completed year of
service or in excess of 6 months.
(b) Rs. 50,000 .
(c) The amount of gratuity actually received.
In other cases, the exemption is available in respect of amount of gratuity actually received.
IF GRATUITY IS RECEIVED FROM MORE THAN ONE EMPLOYER IN THE SAME YEAR,
WHAT WILL BE THE CEILING?
The Ceiling of Rs.3,50,000 would apply to aggregate of gratuity from one or more
employers in the same year in case of retirement or death etc. occurring after 24.9.97 Prior
to that date, ceiling was Rs.2,50,000.
IF THE GRATUITY IS RECEIVED FROM DIFFERENT EMPLOYERS IN DIFFERENT
YEARS WILL THE CEILING BE DIFFERENT?
No. The ceiling will still be Rs,3.5 lakhs or Rs.2.5 lakhs as specified in the preceding
paragraph.
EMPLOYER'S CONTRIBUTION TO PROVIDENT FUND
The annual contribution of employer to the balance in a employees' account in a recognised
fund is exempt to the extent it does not exceed the limit as given below: ~
(i) The employer's contribution should not exceed 12% of the employee's salary (excluding
allowance and perquisites but including D.A if it forms the part of salary as per terms
of/employment). If it exceeds, the excess over 12% is taxed.
(ii) Interest on the accumulated balances should not be paid at a rate higher than 12% per
annum. Such interest in excess of this exempted limit forms part of the employee's salary,
and the deduction under section 80-L is also not allowable in respect of such interest.
HAS THERE BEEN A CHANGE IN RATE OF EMPLOYEE'S CONTRIBUTION TO HIS
PROVIDENT FUND?
Yes. After 22nd September 1997 it has been raised upto 12% (previously 10%) by the
Employee's Provident Fund 85 Misc. Provisions [Amendment Ordinance, 1997 (17 of 1997)].
EMPLOYER'S CONTRIBUTION TO SUPERANNUATION FUND
HAS THERE BEEN A CHANGE IN RATE OF DEDUCTION ALLOWED ON ACCOUNT OF
INITIAL CONTRIBUTION THAT AN EMPLOYER MAY MAKE FOR PAST SERVICES OF
EMPLOYEE ?
Yes. Upto 21st Sept.
1997 the tax deductible contribution by an employer was
upto 25% of the annual salary of the employees. Now this limit has been increased to 27%
of the employee's salary for each year. [I.T. (Second Amendment) Rules 1998, G.O.I.
Gazette Notification No. S.O. 50(E) dt. 16th Jan. 1998; CBDT F.No. 142/79/97-IPL No.
105071.
HAS THERE BEEN A CHANGE IN RATE OF ANNUAL CONTRIBUTION TO A
PROVIDENT FUND BY EMPLOYEE AND EMPLOYER?
Yes. After 22 nd September 1997, the annual contribution by an employer and employee
(taken together) to a superannuation fund in respect of any particular employee shall not
exceed 27% (previously 25%) of his salary, for each year.
ESOPs OR SWEAT EQUITY
ESOPs or SWEAT EQUITY is the stuff that has made crorepatis of even car-drivers in
Company(s) like Infosys. These are relatively new in India but gradually becoming the most
favoured portion of remuneration in private Company (s).
WHAT ARE ESOPs?
ESOPs or "Employees Stock Options Plans" is the generic term for a basket of instruments
and incentive schemes that find favour with the new upward mobile salary class and which
are used to motivate, reward, remunerate and hold on to achievers.
ESOPs are generally granted in the from of directly allotted shares, debentures or warrants,
stock options etc. These ESOPs can have numerous variations/ alternative options.The
characteristic facet of these ESOPs is that the compensation gets linked with the increase in
the price of the shares of the Employer Company or rather the net worth of Company.
VARIETY OF ESOPs
First variety of ESOPs is the scheme under which the employee is directly allotted shares by
the Company either at market price or at a concessional price. Source of purchase may be
own funds of the employee or loan(s) from the Company / Banks / Financial Institutions.
Second Variety is when the employee has the 'option' to acquire the shares, debentures or
warrants of the Company at a price that may be the market price or lower than that. After
that there is a waiting period or Vesting Period when the employee has to wait to exercise
his option. After this is the 'Exercise-Period' during which the employee can exercise the
option to seek allotment of shares.
There may also be a 'Lock-in Period' during which the employee can not sell these shares.
Third Variety may be 'Stock Appreciation Rights'. A specified number of shares are
notionally allotted to him at a certain price. At the end of a specified period, the price of the
shares is noted and if the price has increased then the difference is paid to him by the
Company.
Another Variety may be 'staggered options' available to the employee over a period of time.
WHAT IS A STOCK OPTION?
It is a right, but not compulsion. The option-holder may or may not acquire the shares of
the Company during a Specified period at pre-determined price, irrespective of the marketprice at the time of giving the Stock option by the Company or at the time of exercise of the
option by the employee.
There are so many factors to determine the employee's decision. The employee ultimately
may not exercise his option.
WHAT IS SWEAT EQUITY?
'Sweat Equity' means equity shares issued by the company to employees or directors at a
discount or for consideration other than cash for making available know how in the nature of
intellectual property rights or value additions, by whatever name called.
WHO CAN ISSUE SWEAT EQUITY?
All Company(s), whether private, public, listed or not-listed can issue Sweat Equity Shares,
WHAT IS THE DIFFERENCE BETWEEN 'SWEAT EQUITY' AND 'ESOPs?
There may be no difference as the objective of both is to remunerate the employee. Sweat
Equity is only for issue-of shares, debentures or warrants at a discount or even nil
consideration. ESOPs are incentive scheme(s) to motivate and retain productive employees.
CAN 'SWEAT EQUITY' BE ISSUED FOR FREE?
The Law has not set any limit on the rate of discontent for issue of shares to employees.
WOULD THE BENEFIT TO THE EMPLOYEE ON ACCOUNT OF FREE OR CONCESSIONAL
ALLOTMENT OR SHARES, DEBENTURES OR WARRANTS BE NOT TAXED AS
PERQUISITES?
Yes and no, both! For A.Y. 2000-01, the difference between the market value and the cost
of acquisition of such shares, debentures or warrants was taxable as perquisites. However,
for A.Y.2001-02 and subsequent year(s), the Law stands modified and such benefit(s) are
not to be taxed as perquisites. Mere grant of stock options or even exercise of such stock
options whereby shares are in fact allotted does not attract tax as perquisite(s). They are to
be taxed only once when sold, as capital gains.
BUT WHAT SHALL BE THE COST OF THE SHARES IF THE TAX HAD BEEN LEVIED AS
PERQUISITE AT THE TIME OF EXERCISE OF OPTION?
In case where tax has been levied as perquisite at the time of the exercise of the option by
the employees, its fair market value at the time of exercise of option shall be the cost of the
share for working out the capital gain. This amendment is w.e.f. 1.4.01 and, applies in
relation to the A.Y. 2001-2002 and subsequent years.
DOES IT MEAN THAT TRANSFER OF CAPITAL ASSETS RECEIVED AS ESOPs or
SWEAT EQUITY WOULD NOT ATTRACT CAPITAL GAINS TAX?
No. Now w.e.f. 1.4.2001 i.e. for A.Y. 2001-02 and subsequent year(s), even when such
share(s), debenture(s) or warrant(s) (received as ESOPs/Sweat Equity) are transferred
under a gift or an irrevocable trust, the transaction will be a taxable transfer. The transfer
consideration will be the market value of such assets minus the cost paid by the employee,
if any.
AT WHAT RATE IS THE LONG
TERM
CAPITAL GAINS IN RESPECT TO
GDRs ISSUED TO EMPLOYEES UNDER ESOPQ TAXABLE?
On Income by way of dividends or long term capital gains Global Depository Receipts
(GDRs) of an Indian company purchased by a resident employee of such company engaged
in information technology software and/or services, as per a notified ESOP, is taxable @
10% u/s 115 ACA.
DO THESE PROVISIONS EXTEND TO SUBSIDIARY COMPANIES, OTHER
KNOWLEDGE BASED INDUSTRIES?
Yes. With effect from 1.4.02, i.e, in relation to the A.Y. 2002-2003 and subsequent years,
this concessional rate of taxation now extends to income in respect of GDRs purchased by
employees of companies engaged in other knowledge based sectors also, viz.,
entertainment service Pharmaceuticals, bio-technology industry or service as may be
notified. The concessional rate of taxation also applies to income from the GDRs purchased
by employees of subsidiary companies, whether domestic or foreign, of the above
companies.
WHAT IS THE POSITION OF TDS IN THE YEAR SUCH ESOPs OR SWEAT EQUITY ARE
GIVEN/ALLOTTED BY THE COMPANY?
When w.e.f 1.4.01 the Income Tax Act, 1961 does not consider concessional allotment of
share(s), debenture(s) or warrant(s) be treated as perquisites so the question of deducting
TDS is extraneous for A.Y, 2001-02 and subsequent year(s).
THE DEDUCTIONS FROM SALARY INCOME UNDER SECTION 16
The following deductions are available from salary income:-
1. Standard deduction.
2. Deduction for professional or employment tax
3. Deduction of entertainment allowance.
STANDARD DEDUCTION
For A.Y. 1998-99, Standard deduction of a sum equal to 33-1/3% of the salary or Rs.20,000
whichever is less, was allowed to an individual having income from salary.
Then w.e.f. 1-4-99 this limit of Standard deduction for assessees having salary income upto
Rs. 1,00,000 was increased from Rs.20,000 to Rs.25,000, However, the benefit of standard
deduction to assessees having salary income of more than Rs. 5,00,000 was withdrawn.
This implies that an assessee earning salary income between Rs. 1 lac and Rs.5 lacs will
only be entitled to a Standard deduction of a sum equal to 33-1/3% of the salary or
Rs.20,000 whichever is less.
IS STANDARD DEDUCTION ALLOWABLE TO PENSIONERS?
Yes.
The standard deduction is also allowable to pensioners.
DEDUCTION FOR PROFESSIONAL OR EMPLOYMENT TAX
Professional tax or employment tax, levied by a State Government is eligible as a deduction.
The amount so paid can be deducted from the taxable salary.
ENTERTAINMENT ALLOWANCE
Upto A.Y. 2001-02 Entertainment allowance is first , included in the employee's salary
and then exemption is allowed as given here-in-below:(a) In the case of Government employee the least of
(i) Rs.5000 or,
(ii) 20% of salary (exclusive of any other allowance), is allowable as a deduction.
(b) In the case of non-Government employees least of the
following : (i) Entertainment allowance regularly received from his present employer from a date prior
to 1.4.1955 or,
(ii) A sum equal to 1/5th of salary (exclusive of any other allowance, benefit or perquisite)
or,
(iii) Rs.7,500, is allowed as a deduction.
HAS THERE BEEN A CHANGE IN ALLOWABILITY OF ENTERTAINMENT ALLOWANCE?
Yes. With effect from 1 st April, 2002, i.e. in relation to the assessment year 2002-2003 and
subsequent years, this provision relating to deduction of entertainment allowance stands
omitted in the case of employees in continuous employment since the 1 st April, 1955 under
section 16.
RELIEF ON ARREARS OF SALARIES
IS THERE A RELIEF AGAINST HIGHER TAX RATES WHEN SALARY IS PAID IN
ARREARS OR IN ADVANCE?
Yes. If because of Payment of salary in arrears or in advance, or payment of compensation
or provident Fund or gratuity etc., an assessee's income becomes assessable at a higher,
rate in a particular year than at which it would otherwise have been assessed, the Assessing
Officer is bound by Section 89(1) to grant relief as prescribed. This enables the assessee to
pay the tax at lower rates.
WHO WOULD GRANT RELIEF TO PENSIONERS U/S.
16, 88, 88B AND 88C?
The deductions from the amount of pension of standard deduction under section 16 and the
tax rebate U/S 88B will be allowed by the DDO/Bank, before making payment to pensioner.
For rebate under section 88 on account of contribution to Life Insurance, Provident Fund,
NSC etc., if the pensioner furnishes the relevant details to the banks, the tax rebate will
also be allowed. Necessary instructions were issued by the Reserve Bank of India to the
Banks vide RBFs Pension Circular (Central Series) No. 7/C. D. R./ 1992 (Ref. Co. DGBA: GA
(NBS) No. 60/GA. 64 (11 CVL)-91/92) dated the 27th April, 1992, and, they must be
followed by all the Banks, which have been entrusted with the task of payment of pensions.
WHICH FORM IS SPECIFIED FOR CLAIMING RELIEF u/s 89 (1)?
Yes, it is Form No. 10E
WHICH RULE IS RELEVANT FOR DETERMINATION OF RELIEF U/S 89(1)?
The relevant rule for determination of relief u/s 89(1) is Rule 21A of the I.T. Rules 1962.
HOW IS THE RELIEF U/S 89(1) COMPUTED?
It is computed as per following steps; 1. Salary of current year it arrears + advances
A
2. Tax on (A) at current rates
B
3. Current Salary (i.e) Others excluded
C
4. Tax on (C) at current rates
D
5. Deduct: [D (-) B]
E
6. Add arrears to total income of year to which it relates
F
7. Tax on (F) at rates of that year
G
8. Total income of that year (-) arrears
H
9. Tax on (H) at rates of that year
10.Extra tax for that year : [G (-) I}
11.Relief: {E (-) J}
12.Tax payable for the current year {B (-) Relief}
WHERE THE PAYMENT IS NOT IN THE NATURE OF SALARY PAID IN ARREARS OR
IN ADVANCE OR GRATUITY OF PAST SERVICES OR COMPENSATION RECEIVED AT
OR IN CONNECTION WITH THE TERMINATION OF EMPLOYMENT OR IN
COMMUTATION OF PENSION WILL RELIEF U/S 89(1) BE APPLICABLE?
Yes. Even in such a case, as per Rule 21A(6), the CBDT may, having regard to the
circumstances of the case, allow such relief as it deems fit. Aggregate salary of the
employee who is or has been in receipt of salary from more than one employer.
The employee furnishes to the chosen employer details of the income under the head
'Salary' due/received from the former/other employer and also tax deducted at source there
from in writing and duly verified by him and by the former/other employer. Then the
present employer will deduct tax at source on the both salary(s).
IS IT NECESSARY THAT DEDUCTIONS AND REBATES CLAIMED SHOULD HAVE BEEN
MADE OUT OF INCOME CHARGEABLE TO TAX?
Yes. Absolutely. It is to be strictly noted that deductions rebates under Chapter VI-A of the
IT Act, 1961 are allowed only if the investments/payments are made out of the income
chargeable to tax of the financial year relevant to the assessment year under consideration.
IF THE TAX PAYER ALSO ENJOYS INCOME UNDER OTHER HEADS OF INCOMES /
SOURCES, SHOULD THE EMPLOYER DEDUCT TDS ON SUCH OTHER INCOME(S)?
Not necessarily. An option to be is given U/S 192(2B) which enables a tax payer to furnish
details of income under any head other than Salaries and to get TDS thereon.
The employer shall take such other income and tax, if any, deducted at source from such
income, into account for the purpose of computing tax deductible under section 192 of the
Income-tax Act. From 1.8.98 the DDO's have been empowered to take into account the loss
if any under the head "Income from House Property" for making deduction of Income-Tax
U/S 192(1).
IF THE SALARY IS BEING PAID IN FOREIGN CURRENCY WHAT WOULD BE ITS
TAXABLE VALUE?
For the purpose of TDS on salary payable in foreign currency, the value in rupees shall be
calculated at the prescribed rate of exchange, for each such payment.
CAN TDS BE MADE AT A LOWER RATE OR NO DEDUCTION BE MADE ALTOGETHER?
Yes. Section 197 enables the tax payer to make an application in Form No. 13 to his
Assessing officer. In the absence of such a certificate from employee, the employer should
deduct income tax on the salary payable at normal rates (Circular No. 147 dated 28-101974).
IF THE EMPLOYER DOES NOT ISSUE A TDS CERTIFICATE, IS THERE A REMEDY?
Yes. .As per Section 203, every person responsible for TDS must furnish a certificate to the
payee that tax has been deducted and to specify the amount so deducted. This TDS
certificate, must be furnished within one month from the end of the relevant financial year.
Even the banks deducting tax at the time of payment of pension or bank-interest are
required to issue such certificates. This certificate is to be issued on the tax deductor's own
stationary.
If he fails to issue the TDS certificate to the tax payer concerned, he will be liable to pay, by
way of penalty, under section 272A, a sum @ Rs.100 for every day during which the failure
continues. However, the penalty shall not exceed the amount of tax deductible.
IS THE LIABILITY OF THE EMPLOYER TO DEDUCT AND PAY TAX U/S 192(1)
ABSOLUTE AND WHAT IF HE FAILS TO DO SO?
Yes. Such liability is absolute and any failure would attract interest liability as well as other
penal provisions. (CBDT F. No. 237/4/75-A/ PAC 11/23.11.76.]