CHAPTER III
Salary
Scheme of sections (15 to 17)
Salary due
Section 15 - Chargeability Salary paid /Allowed
Arrears of salary
Section 16 - Deductions Entertainment allowance received
Professional tax
Components (9 Nos.)
Fully tax-free
Section 17 – Income from salary Perquisites. Always taxable
Taxable in specified cases
Profits in lieu of salary
Compensation Any payment Payment Amount due or received under received from
key-man insurance Policy any person before
Allowances joining
1. Entertainment allowance employment
2. Foreign allowance
3. Medical allowance
with or after
cessation of
4. Special allowance employment with
5. Dearness allowance that person.
6. House rent allowance
7. City compensatory allowance
8. Conveyance allowance
9. Travelling allowance
10.Transport allowance
11.Any other allowance
Scheme of computation
1.
Salary:
Salary, pay, wages (Including arrears/advance)
Fee
Commission
Pension
Annuity
Bonus
Taxable annual accretion
Taxable transferred balance
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2. Allowances:
Dearness allowance
Taxable HRA
Entertainment allowance (Full amount)
Other allowances (Taxable portion)
3. Perquisites:
Rent free house
Sweeper, watchman etc.
Any other perquisites
4. Profits in lieu of salary:
Taxable amount of compensation
Taxable gratuity
Taxable commuted pension
Any other
1.
Gross salary
6. Deductions
Entertainment allowance (Only to Govt. employees)
Professional tax
7.
Taxable salary
15(Chargeability): -
The following incomes are chargeable to tax under the head salary.
(i) Any salary DUE from an employer or former employer, to an assessee, in the previous year, whether paid or not.
(ii) Any salary PAID or ALLOWED to him in the previous year by or on behalf of an employer or former employer; though not due or before it becomes due to him.
(iii) Any ARREARS of salary paid or allowed to him in the previous year by or on behalf of an
employer or former employer; if not charged to income tax in an earlier previous year.
16(Deductions): -
1.
Deduction in respect of entertainment allowance received: Only Govt. employees are eligible for this deduction. Least of the following will be allowed as deduction. (i) One fifth of basic salary (b) Rs. 5000 (c) Actual entertainment allowance received.
2.
Professional tax: Professional tax actually paid by the assessee.
17(Income from salary): -
(i) Components of salary: 1 Wages 2.Annuity or pension 3.Gratuity 4. Fee, commission, perquisites, profits in lieu of or in addition to salary 5. Advance salary (other than vehicle/housing loan) 5a. Any payment received by an employee in respect of any period of leave not availed of by him. 6. Taxable portion of annual accretion to the balance of a RPF. 7
Taxable portion of transferred balance to a RPF. 8. Contribution by Central Govt. to an employee’s pension scheme.
(ii) Perquisites: Perquisite means any casual emolument, fee or profit attached to an office or
position, in addition to salary.
Tax-free perquisites:
1. Free medical aid to the employee or to his dependent family members including reimbursement of medical expenses and premium paid by employer on health insurance of employee. (Hospital must be a recognised public hospital in India. If hospital is not owned by the employer or not a recognised one maximum exemption in this respect shall be Rs. 15,000.
In the case of medical treatment from outside India, expenses of stay and treatment of the

3 patient and stay expenses of one attendant shall be exempted to the extent permitted by RBI.
Expenditure on travel of patient and attendant shall be exempted in the case of an employee whose GTI does not exceed Rs. 2 Lakhs. Medical facility other than exempted medical facility
is a perquisite taxable in specified cases only. But where the facility is in the nature of an
obligation of employee discharged by employer (Bill in the name of employee but payment
made by employer), it is a perquisite always taxable.
2. Free refreshments during working hours.
3. Free food given to employees during working hours in a remote area or in an offshore installation site as also free or subsidised food given to all employees alike. Free food provided
during working hours at office or work premises or through non-transferable paid vouchers
usable at eating joints up to an amount calculated @ Rs. 50 per meal will also be exempted
Any excess shall be taxable in the hands of all employees as a fringe benefit. Any amount
recovered from the employee towards this perquisite also must be deducted .
4. Free refresher courses, education, training etc. to employees.
5. Free ration to personnel of armed forces.
6. Free telephone facility including mobile phone.
7. Employer’s contribution to staff group insurance scheme.
8. Employer’s contribution to employees’ personal accident policy, pension or deferred annuity scheme, superannuation fund (not exceeding Rs. 1 Lakh in a year), RPF (Up to 12% of salary)
etc.
9. Rent free house, conveyance facilities and allowances to High Court and Supreme Court judges.
10. Leave travel concession (Actual journey expenses only are allowed) if given twice in a
block of 4 years.
11. Rent free house and allowances to M.Ps, M.L.As, Union misters etc.
12. Scholarships to employees’ children.
13. Concession-interest or interest free loans to employees if the total amount of loan in a previous year does not exceed Rs. 20000 or loan is taken for the medical treatment of specified diseases. (Taxable value of interest free loan from employer in any other case will be the sum equal to the interest computed at the rate charged per annum by SBI as on the first day of the relevant previous year in respect of loan for the same purpose advanced by it. In the case of concession interest loans, the difference between prescribed rate and actual rate charged is taken as perquisite value. This is a fringe benefit and taxable in all cases.
14. Free education to employees’ children given by employer from his own resources provided the value of such benefit does not exceed Rs. 1000 p.m. per child. (If value exceeds this limit or if the facility is provided to other household members of the employee, it will become taxable in the hands of specified assesses. In such cases if the facility is provided to the children of the employee, market cost of such education less (Rs. 1000 p.m. per child plus any amount recovered from the employee) will be taken as the perquisite value. If education facility is provided to the household members of the employee, market cost of such facility minus amount

4 recovered from the employee will be the perquisite value. If education facility is provided to the children or household members of the employee in an institution other than that owned by the employer, actual expenditure incurred by employer in this respect less amount if any, recovered from the employee will be the perquisite value). If the educational expenses of his
children are met by the employee but later reimbursed by the employer, or if school fees of
family members of employee are directly paid by the employer to the school, it is treated as
an obligation of employee discharged by employer and therefore taxable in all cases fully.
15. Facility of conveyance provided by employer from residence to place of employment and vice versa.
16. Lap tops and computers provided by employer for personal use of employee or any member of his household.
17. Residential accommodation located in a remote area provided to an employee working in an offshore site, project execution site or mining site.
18. Periodicals and journals required for discharge of work.
19. Transfer (without consideration) of movable assets (other than cars, electronic items and computers) to employee after using it for 10 or more years.
20. Tax on perks paid by employer.
21. Sale of goods manufactured by employer to employee at concession rate.
22. Perquisites and allowances to Govt. employees posted abroad.
23. Facility of holiday homes / guest houses maintained by employer, touring, travelling and
holiday enjoyment made available to all employees uniformly. These facilities if not uniformly
provided to all employees shall be taxable as fringe benefit in all cases. Actual expenditure
incurred by the employer less amount recovered from employee towards this facility will be the
perquisite value. If these facilities are maintained by the employer himself, then, perquisite
value will be taken as the value at which similar facilities are offered by such other agencies.
24. Gift in kind by employer to employee or to the family members of the employee, if value is
not more than Rs. 5000 in the aggregate in a previous year. Gift in cash or gift cheques shall be
fully taxable. In the case of gifts exceeding Rs. 5000 in the aggregate in a year, excess over
Rs.5000 is taxable in the case of all assesses as a fringe benefit.
25. Recreational facilities.
26. Value of shares or debentures given to employees free of cost under ESOP Scheme.
27. Any unauthorised use of benefits.
Perquisites taxable in all cases:
1. Rent free accommodation 2. Concession-rent accommodation 3. Obligations of employee discharged by employer (Examples are, club bill, hotel bill, medical bill, gas, electricity or water bill of employee paid by employer, loan due from employee paid by employer, education expenses of employee’s children paid by employer, income tax or professional tax of employee paid by employer, salary of personal attendant appointed by employee paid by employer, legal expenses incurred to save or defend the employee). 4. Any amount expended by employer to affect a scheme of annuity or

5 insurance on the life of the employee 5. Value of specified security or sweat equity shares allotted or transferred by employer or former employer to employee. 6. Contribution to approved superannuation fund of the employee in excess of Rs. 1 lakh. 7. Fringe benefit/ amenity. (These include 1. Interest free
/ concession-interest loan 2. Use of movable assets other than car, computer and phone 3. Transfer, without consideration, of movable assets. 4. Club facility. 5. Credit card facility. 6. Gift/
Voucher/Token. 7. Travelling/ Touring/Accommodation. 8. Food/ Beverages.
Perquisites taxable in specified cases only:
1. Motor car or any other automotive conveyance. 2. Gas, water, electricity 3. Education facility to the children of employee. 4. Sweeper, watchmen, gardener, personal attendant etc. 4. Transport facility provided by employer engaged in transport byusiness.5. Medical facilities. 6. Other perquisites not mentioned above.
In these cases the employer should provide the facility in kind. If the employer provides requisite cash for obtaining these facilities, it shall be taxable always.
The specified cases are: 1. if provided by a company to its director employee 2. if provided by a company to one of its employees having substantial interest in the company (Holding not less than
20% of the voting power) 3. if provided by an employer to its employee whose total monetary emoluments under the head salary exceed Rs. 50,000 p.a.
(iii) Profits in lieu of salary: Profits in lieu of salary means an advantage or gain by receipt of payment by employee. It mainly implies terminal benefits available to an employee.
1. Compensation due to or received by an assessee from an employer or former employer in connection with the termination of employment or modification of the terms of employment. 2.
Payment due to or received by an assessee (Not being a payment unconnected with the employment) from an employer or former employer or from a provident fund or other fund, to the extent to which it does not constitute assessee’s own contribution and interest thereon. All allowances come under profits in lieu of salary as per section 17(3)(2). An allowance may be 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.
Dearness allowance – Fully taxable. House rent allowance – Partially taxable. City compensatory allowance – Fully taxable. Conveyance allowance – Excess over actual amount spent is taxable.
Foreign allowance – Fully exempted. Entertainment allowance – Taxable but eligible for deduction.
Travelling allowance – Excess over actual amount spent is taxable. Medical allowance – Fully taxable.
Special allowances – Special allowances are of two types. (i) Those, which are granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties. U/s 10(14) such allowances are exempted to the extent to which they are actually expended in the performance of duties. (ii) Those which are granted to meet the personal expenses of the assessee. These are exempt up to a specified limit. For example, Children’s education allowance- Exempted, if received in India, up to Rs. 100 per child per month up to a maximum of two children. Allowance to meet education expenses (hostel expenses) of children – Exempted, if received in India, up to Rs. 300 per child per month up to a maximum of two children. Transport allowance – Exempted up to Rs.800 p.m.(In the case of blind / handicapped employees maximum Rs. 1600 p.m. Flight allowance – 70% of the allowance received or Rs.6000 per month whichever is less.
3. Any payment received under key-man insurance policy. 4. Any amount due to or received from any person before his joining any employment with that person or after cessation of his employment with that person.
Note: - Key-man insurance policy is a policy taken on the life of one person by another person in whose organisation the insured plays a key role. Premium paid on such policy is chargeable as business expense by the person who has taken the policy. If the policy sum is made payable to the insured up on maturity the same shall be chargeable to tax in the hands of the insured as salary
(precisely, profits in lieu of salary) and if it is made payable to the person who has taken the policy it is taxable under ‘Profits and gains of business or profession’. If the maturity value is made payable to any person other than the employer and employee, the same shall be taxable under ‘Other sources’.

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VALUATION OF PERQUISITES
Rent free accommodation
In the case of Govt. employees, license fee determined by the Govt. in accordance with Govt. rules will be the perquisite value. Here it is immaterial whether the house is owned by Govt. or hired. If the house is furnished 10% p.a.of the cost of furniture or actual hire charges as the case may be should be added with the above value. If any amount is recovered from the employee towards the house that should be deducted from the value to reach at the perquisite value of concession- rent accommodation.
In the case of other employees, if the house is owned by the employer valuation is made as follows.
For houses situated in cities with a population exceeding 25 Lakhs as per the 2001 census, @ 15% of salary in respect of period of occupancy of house will be the perquisite value. For houses situated in cities with population exceeding 10 Lakhs, but not exceeding 25 Lakhs, @ 10 % of salary in respect of period of occupancy of the house will be the value.7.5% of salary in respect of period of occupancy will be the perquisite value in the case of other cities. If the employer hires house, 15% of salary or actual rent paid whichever is less is the perquisite value, in all cities. Here also if the house is furnished
10% of cost of furniture or actual hire charges will be added with the valuation. If any amount is recovered from the employee towards the rent of the house the same should be reduced from the value.
In case employer provides accommodation (Govt. or other) to the employee in a hotel, valuation will be done in the following manner. Where accommodation is provided on the transfer of employee and the period of stay does not exceed 15 days, perquisite value is nil. In any other case, 24% of salary for the previous year in respect of the period of stay in hotel or actual bill paid to the hotel whichever is less is the perquisite value. From this value, if any amount is recovered from the employee that should be reduced.
Where on account of transfer from one place to another an employee is provided with an accommodation at the new place of posting and retains the accommodation at the old place, perquisite value of house will be calculated for one house, which has lower value. This benefit shall be available for a maximum period of 90 days. If he continues to occupy both the houses after the expiry of 90 days, the value of perquisite shall be charged for both the houses with effect from the day 90 days are over.
Motor car. (Taxable in specified cases only)
If the car is owned / hired by the employer (running and maintenance expenses also met by the employer) and is used exclusively for official use, perquisite value nil. If car is used exclusively for personal purposes, actual running and maintenance expenses including driver’s salary incurred by the employer + depreciation @10% p.a. of cost will be the perquisite value. (No depreciation if the care is a hired one). Amount if any recovered from employee must be deducted from this value. If car is used both for official and personal purposes and the running and maintenance expenses are met by the employer, for a car up to and including 1.6 ltr. capacity, Rs.1800 p.m. and for car exceeding 1.6 ltr. capacity Rs.2400 p.m. will be the perquisite value. Rs. 900 p.m. must be added with this if a driver is also provided by the employer. In this case, if the running and maintenance expenses attributable to the personal use of the car are met by the employee himself, for a car up to and including 1.6 ltr. capacity,
Rs.600 p.m. and for car exceeding 1.6 ltr. capacity Rs.900 p.m. will be the perquisite value. Rs. 900 p.m. must be added with this if a driver is also provided by the employer. If car is owned by the employee and expenses attributable to its official use are paid or reimbursed by the employer, perquisite value nil. Where the reimbursement of expenses is wholly related to personal use, the actual amount of expenditure paid or reimbursed by the employer will be the perquisite value. Where the reimbursement of expenses is related partly to personal use and partly to official use, actual expenditure minus Rs.2400 p.m + Rs 900 p.m towards driver’s salary will be the perquisite value for a big car and actual expenditure minus Rs.1800 p.m + Rs 900 p.m towards driver’s salary will be the perquisite value for a small car. In case any other automotive owned by employee and used by him both for personal and official purposes and the expenses are met by the employer, actual expenditure in this respect minus an amount equal to Rs. 900 per month will be the perquisite value.

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Gas, water, electricity (Taxable in specified cases only)
Where employer makes the supply of these from resources owned by him, perquisite value shall be taken at the manufacturing cost per unit incurred by him. Where employer arranges these facilities from an outside agency, perquisite value shall be the actual amount paid by employer to the supplying agency. In both these cases whatever amount recovered from the employee towards these services should be deducted. If the electricity, gas or water connection is in the name of the employee and employer makes payment it is a perquisite taxable in all cases as obligation of employee discharged by employer. Actual amount is taxable.
Sweeper, gardener, watchman, personal attendant (Taxable in specified cases only)
If employee appoints and employer pays these persons, full amount paid shall be taxable in the hands of all employees. If employer appoints these persons and wages are paid by employer perquisite value will be the actual amount expended by employer. If any payment is made by employee towards the salary of these persons the same should be deducted. If an employer provides a rent free house (Owned by employer) to his employee, expenses (including gardener’s salary) incurred by the employer on maintenance of garden and ground attached to the house is not taxable separately.
Transport facility(Taxable in specified cases only)
Free/ concessional tickets provided for the private journey of employee or his family members by an employer engaged in transport business is a perquisite taxable in specified cases. The value at which the facility is offered by the employer to outsiders will be the perquisite value in such cases. Amount, if any, recovered from the employee must be deducted from that value.
Use of movable assets
It is a fringe benefit, always taxable. Perquisite value is taken as 10% p.a. of the actual cost of the asset, if the asset belongs to the employer. If the asset is one hired by the employer, actual hire charges payable by him will be the perquisite value. Any amount recovered from the employee towards this perquisite must be deducted from the value determined. However, if the asset was one used by the employer for more than 10 years, perquisite value to be taken as nil.
Transfer of movable asset
Transfer of movable assets by employer to the employee after using for 10 or more years is fully tax free. Otherwise it is a perquisite always taxable as Fringe. The perquisite value is taken as the W.D.V. of the asset minus amount recovered from the employee, if any. W.D.V. is to be ascertained by taking rate of depreciation at 50% in the case of electronic items, and 20% in the case of cars, for each completed year (Using W.D.V. method of depreciation in both cases). In the case of other assets depreciation is to be taken at 10% for each completed year, on straight lime method.
Credit card facility
This is a perquisite taxable in the hands of all employees as fringe benefit. Actual expenditure incurred by the employer in this regard less amount if any recovered from employee will be the perquisite value.
Club/ health club facility
This is a perquisite taxable in the in the hands of all employees as fringe benefit. Actual expenditure incurred by the employer in this regard less amount if any recovered from employee will be the perquisite value. However, if the facility is wholly meant for official purpose, perquisite value is nil.
Sweat equity shares allotted
The FMV of shares or securities thus issued will be taken as the perquisite value. In the case of issue at concessional price, FMV of such shares less amount recovered from the employee towards value will be the perquisite value.

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Any other benefit
The value of any other benefit, amenity, right or privilege provided by employer to the employee is determined on the basis of cost to the employer.
COMPUTATION OF TAXABLE AMOUNT OF SOME OTHER PAYMENTS FORM PART OF
SALARY
1.Gratuity
Gratuity received by all Govt. employees and employees of local authorities are fully tax-free. Gratuity paid under the Payment of Gratuity Act 1972 is tax free subject to the following limits.
(i) Actual gratuity received (ii) 15 days (7 days in the case of seasonal factories) wages for every completed year of service or part thereof in excess of 6 months, calculated on the basis of the salary last drawn. (iii) Rs. 350000; whichever is less. Wages here mean basic wages plus D.A. but nothing else. While computing 15 days wages denominator must be 26.
In the case of non-Govt. employees and employees of statutory corporations, least of the following 3 limits will be exempted from actual gratuity received and the rest is taxed.
(i) Actual gratuity received (ii) ½ month salary for each completed year of service calculated on the basis of the average salary for 10 months immediately preceding the month of retirement. (iii) Such limit as the Central Govt. may specify. Present limit is Rs.350000. Salary here means basic salary plus commission on sales received by the employee if such commission is payable to the employee at a fixed percentage of sales achieved by him, but excludes all other items. If D.A is taken for computation of service benefits that also will form part of salary.
2. Commutation of pension
Amount received by Govt. employees, employees of local authorities, public sector undertakings and statutory corporations is fully tax-free. In the case of other employees – (i) if the employee receives gratuity, the commuted value of 1/3 rd of the pension will be exempted. (ii) If the employee receives no gratuity, the commuted value of ½ of the pension will be exempted.
3. Encashment of earned leave
Amount received by encashment of earned leave by employees who are in service is fully taxable.
Amount received by Govt. employees by the encashment of earned leave at the time of retirement is fully tax-free. In the case of other employees, of the total amount received least of the following is exempted and the rest is taxed. (i) Cash equivalent of leave due at average salary (Earned leave entitlement for exemption cannot exceed 30 days for every year of service). (ii) Actual amount received (iii) 10 months average salary (Average salary for this purpose means average salary for 10 months immediately preceding the retirement. Salary here means salary plus D.A and commission on sales.) (iv) Rs. 300000.
4. Retrenchment compensation
Least of the following 3 are exempted and the balance is taxed. (i) Actual amount of compensation received (ii) Such amount not being less than Rs.500000 as the Central Govt. may specify in this behalf (iii) An amount calculated in accordance with the provisions of section 25 F (b) of the Industrial
Disputes Act (An amount equivalent to 15 days average pay for every completed year of continuous service or any part thereof in excess of 6 months). Average pay means, where employee receives monthly salary, average of last 3 months; where employee receives weekly salary, average of last 4 completed weeks; and where employee receives daily wages, average of last 12 full working days.
5.Payment on voluntary retirement
Any payment received by an employee at the time of his voluntary retirement under VRS shall be exempted to the extent of least of the following.
1. Amount equivalent to three months salary for each completed year of service
2. Salary at the time of retirement multiplied by the balance months of service left before the date of his retirement

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3. Amount actually received
4. Rs. 5,00,000
6. House rent allowance
Least of the following 3 limits are exempted and the rest is taxed. (i) Actual HRA received (ii) 2/5 th
of salary (1/2 of salary if the house is at Mumbai, Kolkatha, Delhi or Chennai). (iii) Excess of rent paid over 10% of salary. Salary here means basic salary unless otherwise stated plus commission on sales achieved by the employee.
7. Annual accretion
Taxable annual accretion will consist of (i) Excess of employer’s contribution to RPF over 12% of employee’s salary and (ii) Excess of interest credited to RPF over 9.5% p.a, on the balance standing to the credit of the employee. Salary here means basic salary plus D.A that enters into salary plus commission on sales achieved by the employee.
8. Transferred balance
The balance of URPF, which is transferred to RPF, is called transferred balance. Taxable portion of transferred balance will be the aggregate of annual accretions chargeable to tax for each year of existence of the URPF deeming it to be RPF from the very beginning.
Note: - When final payment is made from an URPF, that part of the balance consisting of employer’s contribution and interest thereon will be included in salary in the year of payment.
Note: - In the following cases, salary includes commission (Earned by the employee as a specified percentage of turn over achieved by him) for the purpose of computation.
1. Valuation of rent free house (Commission paid monthly or on the basis of turn over, both are taken).
2. Computation of taxable amount of gratuity (In the case of non-Govt. employees and employees of statutory corporations). 3. Calculation of taxable HRA. 4. Calculation of taxable annual accretion. 5.
Calculation of taxable amount of earned leave encashed.
TAX IMPLICATIONS OF PROVIDENT FUNDS
The components of a P/F account balance are the following. (i) Own contribution to the fund (ii)
Employer’s contribution (In the case of contributory P/F) and (iii) Interest on the balance of P/F account. Own contribution to SPF, RPF, and PPF qualifies for deduction u/s 80C without any limit.
Contribution to an URPF does not qualify. Employer’s contribution to SPF is wholly exempted from income tax and that to a RPF is wholly exempted up to 12% of employee’s salary. Any excess over
12% will be included (Taxable annual accretion) in salary. Employer’s contribution to an URPF is not included in salary. Interest on P/F account balance is wholly exempted from tax in the case of SPF and
PPF. In the case of RPF interest credited over 9.5% rate p.a will be taxable (Annual accretion), under salary. In the case of URPF interest on own contribution is taxed under the head “Other sources”.
Interest on employer’s contribution is ignored for the time being. Amount received on refund of balance from SPF and PPF is wholly exempted from tax. In the case of RPF also it is fully exempted but subject to certain conditions. In the case of URPF, of the total amount received, employer’s contribution and interest thereon will be included under the head ‘salary’ in the year of refund. rupak.manikath@yahoo.com