3-income under head salaries...
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3 RELEVANCE 5% DEVOTION 3 HOURS INCOME UNDER THE HEAD SAL ARIES HISTORICAL RELEVANCE 14 12 10 8 6 4 2 0 May Nov May Nov May Nov May Nov May Nov May 07 07 08 08 09 09 10 10 11 11 12 Marks
Transcript of 3-income under head salaries...
INCOME UNDER THE HEAD SALARIES
3
RELEVANCE 5%
DEVOTION 3 HOURS
INCOME UNDER THE HEAD SALARIES
HISTORICAL RELEVANCE
14
12
10
8
6
4
2
0
May Nov May Nov May Nov May Nov May Nov May
07 07 08 08 09 09 10 10 11 11 12
Marks
Income under the Head Salaries
Sectionwise Overview:
Section Particulars Page No.
17(1) Definition of Salary 43
15 Charging section 43
Allowances 45
10(13A) House Rent Allowance 45
10(14) Notified/Specific Allowances 47
16(ii) Enter tainment allowance 49
10(6)/(7) Allowances exempt in the case of cer tain persons 50
Fully taxable allowances 51
Perquisites 52
17 Taxable in the hands of all employees 53
Taxable only for specific employees 53
Tax free perquisites 56
Valuation of perquisites 57
Rule 3 Accommodation provided by the employer 58
Fringe Benefits 63
Medical expenses 73
10(5) Leave Travel concession 77
Life Insurance/Deferred Annuity premium 79
Employee Stock Option Plan 79
17(3) Profits in lieu of salary 81
Retirement Benefits 82
10(10) Gratuity 82
10(10A) Pension 85
10(10AA) Leave Salary 86
10(10B) Retrenchment Compensation 89
10(10C) VRS Compensation 90
10(11) Contribution to Provident Fund 92
16 Deductions 93
89 read with Relief 95
Rule 21A(3)
INCOME from salaries is one of the simplest heads of taxation. The entire chapter is contained in
Sec 15-17 together with relevant rules and exemptions.
3.1 Basics
3.1.1 Definition of the term Salary - Sec 17(1): Salary includes –
• Wages
• Annuity or pension
• Gratuity
• Any fees, commissions or perquisites
• Profits in lieu of or in addition to salary
• Advance salary
• Encashment of unavailed leave
• Interest earned in excess of 9.5% on the balance with a Recognised Provident Fund
(W.r.e.f. 01.09.2010 vide Notification No.24/2011 dated 13.05.2011)
• Amount transferred in excess of 12% of salary to Recognised Provident Fund
• Profits in lieu of salary
• Contribution by Central Government to the account of an employee towards a Pension scheme
notified u/s 80CCD.
3.1.2 Charging Section- 15
The following incomes shall be charged to Income Tax under the head “Salaries”
• Any salary due from an employer or a former employer in the previous year whether paid or not
• Any salary paid or allowed to him in the previous year, by or on behalf of an employer or
former employer, before it became due.
• Any arrears of salary paid or allowed in the previous year by or on behalf of an employer
or former employer, if not charged to tax in any earlier year.
Inference:
• Salary is charged to tax on due or receipt basis whichever is earlier
• Existence of an Employer-Employee relationship is a principal requirement for income to be
considered as Salary
• Where salary is received from more than one employer- salary from all employers are taxable
• Salary from former, present or a prospective employer is charged to taxation.
• Salary foregone shall be treated as application of income and charged to taxation on
due or receipt basis whichever is earlier.
• Employee‟s salary income shall include the value of income tax paid by the employer.
• Any voluntary payment made by the employer shall form par t of salary income.
• Salary and wages are not different for taxation purposes.
• Advance salary is taxable on receipt while advance against salary is not salary income as it is in the
nature of a loan from employer.
• Tax Free Salary: Where an employer bears the tax liability of an employee, the employee has to include
the tax paid by the employer as par t of the total salary income. For example, if Mr X has negotiated a
salary of Rs 60 lacs per annum net of tax, with his employer and his employer has paid a total tax of
Rs 15 lacs for and on behalf of Mr X, the total salary income of Mr X shall be Rs 75 lacs and not Rs
60 lacs.
• However tax on non monetary perquisites paid by the employer is exempt u/s. 10(10CC).
Tax paid by employer on salary of employee is exempt u/s 10(10CC) - DIT vs Sedco Forex
International Drilling Inc [2012] 25 taxmann.com 238 (Uttarakhand)
• Salary to a partner: Salary paid to a par tner of a firm is chargeable to tax u/s 28(v) i.e Profits and
gains of business or profession since there is no employer – employee relationship between the firm
and the par tner.
• Salary taxed on due basis shall not be taxed again on receipt and vice-versa
• Section 15 is not attracted in respect of remuneration received by an MLA, when provisions of section
15 are not attracted to remuneration received by him, section 17 cannot be attracted, in respect of
reimbursement of medical expenses, as section 17 only extends definition of „salary‟, by providing
cer tain items mentioned therein, to be included in salary - [2008] 306 ITR 126 (RAJ.)CIT vs Shiv
Charan Mathur. However in the case of Lalu Prasad vs CIT (2009) 316 ITR 186 (Patna) it was held
that pay and allowances received by the Chief Minister of State or a Minister is salary. It cannot be
taxed under the head income from other sources.
• Surrender of Salary : Any surrender of salary by an employee to the Central Government u/s 2 of
the Voluntary Surrender of Salaries (Exemption from Taxation) Act 1961 would be excluded
from the total income of the employee.This benefit is available for both Government and Non
Government employees.
• Where the managing director is forced to refund a par t of his salary since it was in excess of the limits
prescribed by the Companies Act 1956 – the same could not be held to be the assessee‟s income and
therefore was not assessable to taxation – CIT vs Raghunath Murti (2009) 178 (Taxman) 144.
3.1.3 Place of Accrual- Sec 9(1)
• Salary will be deemed to accrue or arise at the place where services are rendered.
• If services are rendered in India but salary is received abroad, then income is deemed to accrue
or arise in India.
• If a person, after having served in India, settles abroad and receives pension abroad, such
pension income shall be deemed to accrue or arise in India.
• Leave salary paid abroad in respect of leave earned in India is deemed to accrue or arise in India.
Exception: In the case of a Government employee, who is a citizen of India and renders
service outside India, salary received shall be treated as income deemed to accrue or arise in
India although services are rendered outside India.
Example: Indian citizen working for Indian embassy at Dubai.
Study of the various provisions in computation of income under the head Salaries can be
broadly classified as:
- Allowances
- Perquisites
- Valuation of perquisites
- Retirement benefits
- Deductions
3.2 Allowances
Allowances are monetary receipts from the employer towards meeting specific expenses- personal
or official in nature. Allowances are of different types and are generally need and occupation
based. Allowances are taxable components of salary income unless they are specifically provided
as a deduction or exemption under the provisions of the Act.
Allowances can be broadly classified as under:
• House Rent Allowance: Sec 10(13A)
• Notified/Specified allowances: Sec 10(14)
• Entertainment allowance allowed as a deduction u/s 16(ii)
• Allowances exempt in the case of certain persons
• Fully taxable allowances.
3.2.1 House Rent Allowance (HRA)- Sec 10(13A) read with Rule 2A
House rent allowance is provided to an employee to meet the cost of rental accommodation.
Exemption under this section shall be the least of the following:
• Actual HRA for the relevant period
• Rent paid (-) 10% of Salary
• 50% of Salary for the relevant period where accommodation is in a metro city and 40% of
salary for Rest of India
• Relevant period means the period during which the rented accommodation was
occupied by the assessee during the previous year.
Salary = Basic + Dearness Allowance (DA) forming par t of salary for retirement benefits
+ Commission as a % of turnover
• Salary is taken on due basis for the period during which the rented accommodation is occupied by the
employee.
• Salary of any other period is not to be included even though it may be received and taxed during the
previous year.
• Where the employee stays in his own accommodation or does not incur any expenditure towards
accommodation, the entire HRA received shall be taxable.
• Metro for this purpose shall mean Chennai, Mumbai, Kolkatta and Delhi.
• Limits for HRA exemption are subject to salary, place of residence, rent and HRA received.
Actual HRA (5,000*12) = 60,000 Total HRA exempted (10,000+24,000) = 34,000 Taxable HRA = 26,000.
Where there is a change in any of these factors, HRA calculations should be broken into
intervals of such change as explained below:
Illustration 1
Mr Homie earns a monthly basic salary of Rs 10,000 (excl HRA) for the previous year. He also
received an HRA of Rs 5000 pm. He pays a monthly rent of Rs 4000. Compute taxable HRA
assuming:
• He stays in Chennai
• He stays in Chennai and his basic salary was Rs 5000 till July
• He stays in Chennai. He stayed in his own house till July and his salary was revised from
Rs 5000 to 10000 in December.
You may assume that other components of salary remained constant in each of the above cases:
Solution:
Case 1: He stays in Chennai (Metro hence 50% of salary is taken for HRA))
Salary for HRA : 10,000*12 = 1,20,000 Actual HRA : 5,000*12 = 60,000 Rent Paid : 4,000*12 = 48,000
Exemption of HRA shall be least of the following:
• Actual HRA for the relevant period : 60,000
• Rent paid (-) 10% of salary : 48,000 – 12,000= 36,000
• 50% of Salary : 60,000
Exempted HRA shall be Rs 36000 and taxable component shall be Rs 24000 (60000-36000).
Case 2: Basic Salary was Rs 5000 till July
Particulars Apr to July (4 months) Aug to Mar (8 months)
Actual HRA 5,000*4 = 20,000 5,000*8 = 40,000
Rent paid (-) 10% salary 16,000 – 2,000 = 14,000 32,000 – 8,000 = 24,000
50% Salary (Note Below) 10,000 40,000
Exempted HRA(Least of the above) 10000 24,000
Note: Salary for relevant period 5,000*4 = 20,000 10,000*8 = 80,000
In this case HRA exemption shall be computed in two parts, since there is a change in one of
the factors relevant for determining exempted HRA
Case 3: He stayed in his own house till July and his salary was revised from Rs 5000 to 10000 in
December.
In this case HRA exemption shall be computed in three parts since there are changes in two
factors relevant for determining exempted HRA at different time frames:
Actual HRA : 5000*12 = 60,000 Exempted HRA : (10000+12000) = 22,000 Taxable HRA = 38,000
Particulars Apr to July
(4 months) Aug to Nov
(4 months) Dec to Mar
(4 months) Actual HRA 5,000*4 = 20,000 5,000*4 = 20,000 5,000*4 = 20,000 Rent paid (-) 10%
salary Nil – as applicant
stayed in his own house 16,000 – 2,000 =
14,000 16,000 – 4,000 =
12,000 50% Salary 10,000 10,000 20,000 Exempted HRA Nil 10,000 12,000 Salary for relevant
period 5,000*4 = 20,000 5,000*4 = 20,000 10,000*4 = 40,000
Note: Where an assessee stays in his residence for whole or part of the year, no exemption of
HRA will be available during such period and the entire HRA is taxable.
3.2.2 Specified/Notified Allowances – Sec 10(14) read with Rule 2BB
These allowances can be categorized into 2 types as under:
• Those which are exempt to the extent of actual amount received or spent which ever is less
• Those which are exempt to the extent of amount received or limits specified.
Let‟s now look at each of these categories in detail:
3.2.2.a Allowances exempt to the extent of actual amount received or spent for the
performance of duty, which ever is less
Nature of Allowance Description
Traveling Allowance Allowance granted to meet the cost of travel on tour or transfer of
duty. Daily / Per Diem
Allowance Allowance granted on tour or transfer to meet daily expenses on
account of absence from normal place of duty Conveyance Allowance Allowance granted to meet the cost of conveyance for official
purposes provided free conveyance is not given by the employer Helper Allowance Cost of helper engaged for official purposes
Research / Academic
Allowance Allowance granted for academic, research and training pursuits
Uniform Allowance Expenditure incurred to meet the cost of purchase and maintenance
of uniform
X, an employee of a management consultancy firm was sent to UK in connection with a project of
the firm‟s client for 2 months in the previous year. In addition to his salary, the firm paid per diem
allowance for the period when he worked in UK to meet expenses on boarding and lodging. The
employer did not deduct tax at source from such allowance. During the course of assessment
of X under section 143(3), the Assessing Officer sent a notice to him asking him to explain why the per diem
allowance received by him should not be charged to tax? X sought your advice.
Solution: Per diem or Daily allowance is not taxable to the extent it is used for official purposes. If it is
proved by Mr X that the amount was entirely spent for official purposes the same shall not taxable.
Conversely if the amount spent is lower than the amount received, such excess shall be regarded as
taxable. The response to the notice shall be sent accordingly based on the relevant facts of the case.
3.2.2. b Allowances exempt to the extent of amount received or limits specified – Rule 2BB
Nature of Allowance Amount Exempt: Lower of Actual amount
received or limits given below Children Educational Allowance Rs 100 p.m per child upto a maximum of 2 children
Hostel Expenditure Allowance Rs 300 p.m per child upto a maximum of 2 children
Tribal Area /Scheduled Area /Agency
Area Rs 200 p.m
Transport Allowance - for commut-
ing between office and residence Rs 800 p.m for normal assessees and
Rs 1600 p.m for the blind and orthopaedically disabled. Counter insurgency Allowance –
granted to the members of armed forces Rs 3900 p.m
Underground Allowance Rs 800 p.m - Granted to an employee working in
uncongenial, unnatural climate in underground mines. High altitude Allowance – granted to
employees of armed forces operating
in high altitude
For altitude between 9000 ft and 15000 ft : Rs 1060 p.m
For altitude above 15000 ft : Rs 1600 p.m
Allowance to transport employees for
personal expenses during duty Rs 10,000 p.m or 70% of such allowance whichever
is less. Exemption is allowed provided the employee
does not receive daily allowance.
Island duty allowance- granted to
employees of armed forces posted in
the islands of Andaman and Nicobar
and Lakshadweep group of islands
Upto Rs 3,250 p.m
Border Area Allowance to members
of armed forces Based on place of operation. Exemption varies from
Rs 200 p.m to Rs 1,300 p.m. Compensatory field area allowance Upto Rs 2,600 p.m in some cases. If this exemption
is claimed, the same employee cannot claim any
exemption in respect of border area allowance Compensatory modified field area
allowance Upto Rs 1,000 p.m in some cases. If this exemption
is claimed, the same employee cannot claim any
exemption in respect of border area allowance Highly active field area allowance Upto Rs 4,200 p.m – granted to the members of
armed forces Special Compensatory (Hill Areas) Al-
lowances to members of armed forces Exemption varies from Rs 300 p.m to Rs 7,000 p.m
Actual amount spent is not relevant for the above mentioned allowances.
For Example: Where an employee receives transpor t allowance of Rs 1,000 p.m and his
monthly travel expenditure for commuting between office and residence is Rs 500 still he would
be eligible for an exemption of Rs 800 pm ie lower of limits specified and actual allowance.
Illustration 2: Ascertain the taxability of the following allowances for Mr Kishore:
• Travelling allowance of Rs 50,000, given for business travel to Mumbai- he however spent
only Rs 35,000 for the purpose.
• Transport allowance of Rs 1,200 p.m for commutation between residence and office.
• Uniform allowance of Rs 25,000 was received however only 50% of the amount was spent for
the purpose.
• A fixed allowance of Rs 4,000 p.m was received towards meeting the educational and hostel
expenditure of his 3 children studying in Ooty. He spends 3 times the amount received for the
purpose.
• During his travel to Kashmir, he received a fixed sum of Rs 500 per day for 20 days, for
meeting his personal expenses. His actual expenditure was Rs 400 per day.
Solution:
Nature of
Allowance Provision Tax implications
Travelling
Allowance Exempt to the extent spent
or received whichever is less Rs 15,000 (50k-35k) will be charged to
taxation. Transport
Allowance Exempt @ Rs 800 p.m Rs 400 p.m (1,200-800) will be
charged to taxation. Uniform Allowance Exempt to the extent spent
or received whichever is less Rs 12,500 (50% of 25k) will be
charged to taxation. Children‟s
educational and
hostel allowance
Educational Allowance
exempt @ Rs 100 p.m*
Hostel Allowance exempt @
Rs 300 p.m*
*Subject to a maximum of 2
children
Total Allowance (4,000*12) Rs 48,000
Less: Exemption
Educational Allowance Rs 2,400
(Rs 100p.m*2 children*12)
Hostel Allowance Rs 7,200
(Rs 300p.m*2 children*12)
Taxable Allowance Rs 38,400 Daily Allowance Exempt to the extent spent
or received whichever is less Rs 100 per day (Rs 500-400) for 20
days ie Rs 2,000 will be charged to
taxation.
3.2.3 Entertainment Allowance- Sec 16(ii)
• This allowance is eligible for deduction u/s 16(ii). Hence the whole of the allowance received
shall be added to salary and then claimed as a deduction u/s 16(ii).
• Benefit of deduction is available only for Government employees.
• Actual amount spent shall not be relevant for the purpose of deduction.
• Amount of deduction shall be the least of the following:
ƒ Actual allowance received
ƒ 20% of Basic
ƒ Rs 5,000.
Illustration 3: Mr Ramesh is a Government employee drawing a monthly salary as follows:
- Basic: Rs 15,000
- DA Rs 7,500
- Entertainment allowance Rs 5,000
Compute his total taxable salary.
Solution:
Basic (15000*12) 1,80,000
DA (7500*12) 90,000
Entertainment Allowance (5,000*12) 60,000
Gross salary 3,30,000
Less Deduction u/s 16(2) WN I 5,000
Taxable Salary 3,25,000
Working note 1
Actual Entertainment Allowance 60,000
20% Basic 36,000
Specified Amount 5,000
Exempted Allowance 5,000
Note: Entertainment allowance is initially added to gross salary at full value and then allowed as a deduction u/s 16(ii).
3.2.4 Allowances which are exempt in the case of certain persons
• Allowance to Government employees working abroad: Allowances to a citizen of India,
being a Government employee and rendering services outside India – Sec 10(7).
• Specified Allowances to High Court and Supreme Court Judges:
ƒ According to Sec 22D(b) of the High Court Judges (Conditions of Service) Act, 1954,
any allowance paid to a Judge of a High Court u/s 22A(2) of the said Act is not taxable.
ƒ Sumptuary allowance paid to Judges of High Court and Supreme Court under the
High Court Judges (Conditions of Service) Act, 1954 and Supreme Court Judges
(Conditions of Service) Act, 1958 respectively is not taxable.
Compensatory allowance received by a Judge under Ar ticle 222(2) of the Constitution is
not taxable since it is neither salary nor perquisite – Bishambar Dayal vs CIT (1976) 103
ITR 813(MP).
• Allowance to an employee of United Nations Organization (UNO) : Allowance paid by the
UNO to its employees is not taxable by virtue of Sec 2 of the UN (Privileges and Immunities)
Act, 1974.
• Remuneration earned by foreign diplomats – Sec 10(6)(ii): Remuneration earned in their
official capacity as an official or a member of staff in an embassy, high commission, legation,
commission, consulate, trade representation of foreign state shall be exempt provided:
ƒ Similar benefits are extended to Indian diplomats in the respective country.
ƒ In the case of members of the staff, the exemption shall be available only if the
following conditions are fulfilled:
– They are subjects of the country represented and
– They are not engaged in any business or profession or employment in India otherwise
than as member of such staff.
• Remuneration received from a foreign enterprise – Sec 10(6)(vi): Any remuneration
received by an individual who is a foreign citizen as an employee of a foreign enterprise for
services rendered by him during his stay in India shall be fully exempt provided:
ƒ The foreign enterprise is not engaged in any business or trade in India
ƒ His stay in India does not exceed in the aggregate a period of 90 days during
the previous year
ƒ Such remuneration is not liable to be deducted from the income of the employer
chargeable under this Act.
• Employee of a foreign ship – Sec 10(6)(viii): Any salary received by an employee of a
foreign ship is fully exempt provided:
ƒ The individual is a non resident foreign citizen
ƒ His stay in India does not exceed 90 days
• Employee of a foreign Government – Sec 10(6)(xi): Remuneration earned by an individual
working with a foreign / Government shall be fully exempt provided:
ƒ The remuneration is provided in connection with his training in India
ƒ The training is given in an establishment or office owned by:
i. The Government; or
ii. Any company in which the entire paid-up share capital is held by the Central Government
or State Government; or
iii. Any company which is a subsidiary of a company referred to in item (ii); or
iv. any corporation established by or under a Central, State or Provincial Act; or
v. any registered society wholly financed by the Central Government or any State
Government.
3.2.5 Allowances which are fully taxable:
Any allowance not forming part of 3.2.1-3.2.4 classifications above shall be fully taxable. Few
of such allowances are given below:
• Dearness Allowance
• City Compensatory Allowance
• Family Allowance
• Fixed Medical Allowance
• Bonus
• Over Time Allowance
• Lunch Allowance
• Servant Allowance
Students please note, if you come across a new allowance say special allowance or fitness
allowance etc first ensure that it does not fall within the list given under 3.2.1 to 3.2.4. Once you
are cer tain it is outside the first four categories simply consider the allowance to be fully taxable.
3.3 Perquisites
Perquisites are generally non monetary benefits or facilities provided by an employer. According
to Sec 17 (2), perquisite includes:
Sec Perquisite 17(2)(i) Value of rent free accommodation. 17(2)(ii) Accommodation provided on concessional rent. 17(2)(iii) Value of any benefit or amenity provided to a specified employee. 17(2)(iv) Obligation of an employee met by the employer. 17(2)(v) Employers contribution to a fund other than:
• Recognised Provident Fund
• Approved Superannuation Fund
• Deposit Linked Insurance Fund.
to effect a life assurance or a contract of annuity. 17(2)(vi) ESOP/ESOS: Value of any specified security or sweat equity shares allotted or
transferred, directly or indirectly, by the employer, or former employer, free of
cost or at concessional rate to the assessee. 17(2)(vii) Contribution to an approved superannuation fund by the employer, to the extent
it exceeds one lakh rupees. 17(2)(viii) the value of any other fringe benefit or amenity as may be prescribed.
Specified Employee – Sec 17(2)(iii):
An employee shall be a Specified employee, if he falls into any of the following 3 categories:
• Director of the company
• Has Substantial Interest in the company
• Income under the head Salaries, exclusive of all benefits and non monetary amenities exceeds Rs
50,000 p.a.
Note:
• Substantial interest u/s Sec 2(32) refers to Beneficial Ownership of not less than 20% in shares.
• Carrying voting rights.
• Not eligible for a fixed rate of dividend.
• Whether having a right to par ticipate in profits or not.
• Income under the head salaries for this purpose shall include salary received or due from one or more
employers.
• Such salary shall include taxable monetary payments like Basic, DA, Bonus, Commission, HRA etc
but shall not include the value of any non-monetary benefits/perquisites.
• Salary arrived above shall be reduced by enter tainment allowance – 16(ii) and professional tax on
employment – 16(iii).
• Tax paid by employer on behalf of employee is perquisite under section 17(2) and, therefore, not
includible in salary under rule 3, for purpose of computing perquisite value of accommodation supplied
by employer to employee – Isao Sakai vs JCIT [2011] 16 taxmann.com 332 (DELHI - ITAT).
Classification of perquisites:
Incidence of taxation on perquisites varies, depending on nature of the benefit and type of
employment. Perquisites can be broadly classified into:
• Taxable in the hands of all employees
• Taxable only for specified employees
• Tax- Free perquisites.
Let‟s now look into each of the above classification in detail.
3.3.1 Perquisites taxable in the case of all employees
i. Rent free furnished or unfurnished accommodation
ii. Accommodation provided by the employer on concessional rent
iii. Obligation of the employee discharged by the employer
iv. Employers contribution to a fund other than:
• Recognised Provident Fund
• Approved Superannuation Fund
• Deposit Linked Insurance Fund
To effect a life assurance or a contract of annuity.
v. Value of shares or securities received free of cost or at concessional rate.
vi. Value of any other benefit, amenity etc provided by the employer.
vii. The amount of any contribution to an approved super annuation fund by the employer in
respect of an assessee to the extent it exceeds Rs 1,00,000
3.3.2 Perquisites taxable only in the case of Specified employees
These perquisites can be broadly classified as:
• Employer providing gardener, sweeper, watchman etc.
• Supply of gas, electricity and water for household
• Free or concessional educational facility to any member of employee‟s household
• U s e o f Motor Car
• Personal or private journey provided free of cost or at concessional rate to an employee or a
member of house hold.
Students please note in the case of perquisites mentioned above if the expenditure is incurred
by the employee and reimbursed by the employer, value of such reimbursement shall be taxable
in the hands of all employees whether they are specified or not. Such reimbursement is in the
nature of an employee‟s obligation met by the employer.
3.3.2.a Provision by the employer of services of a gardener, watchman, sweeper or personal
attendant – Rule 3(3):
Actual salary paid by the employer to the sweeper, gardener etc shall be the value of taxable
perquisite.
Where the helpers have been employed by the employee and their salary is reimbursed by the
employer, the entire reimbursement shall be taxable in the case of both specified and non specified
employees- this transaction is similar to an obligation of the employee met by the employer.
3.3.2.b Supply of gas electricity and water for household – Rule 3(4):
Situation Value of perquisite
Where supply is made from resources owned by the
employer without purchasing from outside agency Actual manufacturing cost per unit shall
be the value of taxable perquisite.
In any other case Amount paid by the employer to the
supplying agency.
3.3.2.c Free or concessional Educational facilities to any member of employee’s household
Rule 3(5):
Situation Value of perquisite
Educational institution is owned and
maintained by the employer Cost of similar educational facility in or near locality
Note: In the case of education to employee’s children,
value of this perquisite shall be nil, provided the cost of
such education does not exceed Rs.1000 pm per child. Where free education is allowed in any
other institution by virtue of his being
in employment of that employer
In any other case Amount of expenditure incurred by the employer.
Member of Household shall include:
• Spouse
• Children and their spouses
• Parents
• Servants and dependants.
In the case of educational facilities provided to employee‟s children, the perquisite is exempt if the
value of such facility does not exceed Rs 1000 pm per child. However if it exceeds Rs 1,000 p.m.
per child, the entire amount is chargeable to tax. For example if the value of the perquisite is Rs 2,500
p.m. per child, the entire Rs 2,500 is chargeable to tax. The limit provided in this clause is not a blanket exemption
however only a conditional exemption and shall not be applicable if the amount exceeds Rs 1,000 p.m.
Value of any amount recovered from the employee on account of the perquisites shall be reduced from the
value of taxable perquisite as given above.
Where the cost of education for employee‟s child exceeds Rs 1000 per month per child
the entire amount shall be considered as taxable perquisite. For the purpose of determining
cost of education, both direct and indirect costs shall be taken into consideration. – CIT vs
Director Delhi Public School [2011] 202 TAXMAN 318 (PUN. & HAR.)
Note: The remaining perquisites namely motor car and transport benefits are discussed
under valuation of perquisites.
Illustration 4
Mr Swaroop is working with X Ltd drawing a monthly basic of Rs 3,000. This apart he works part
time with Y Ltd and receives a monthly remuneration of Rs 1,000. X Ltd has given him an Enfield
Thunderbird Bike for the purpose of his official and personal travel. Fair market value of the bike
is Rs 95,000. Swaroop received an annual bonus of Rs 2,000. Determine whether he is a specified
employee or otherwise assuming:
- He is not a director of X Ltd and Y Ltd
- He has substantial interest in X Ltd
- He is a director of Y Ltd
- His annual bonus was Rs 4,000 instead of Rs 2,000.
Solution:
Annual monetary receipt of Mr Swaroop:
Salary from X Ltd (3000*12) 36000 Salary from Y Ltd (1000*12) 12000 Annual Bonus 2000 Total Monetary Receipts 50000
Since annual monetary receipts do not exceed Rs 50,000, Mr Swaroop is not a specified employee
based on income criteria.
Note: Motorcycle given to employee is not a taxable perquisite. Moreover perquisites are not
considered in determining whether the assessee is a specified employee or not.
Situation Status in X Ltd Status in Y Ltd
He is not a director of X Ltd and Y Ltd Not a specified employee Not a specified employee
He has substantial interest in X Ltd specified employee Not a specified employee
He is a director of Y Ltd Not a specified employee specified employee
His annual bonus was Rs 4,000
instead of Rs 2,000- His monetary
receipts would now be Rs 52,000.
specified employee specified employee
Illustration 5
Mr Hitesh working for JP Morgan earns the following as his monthly pay:
Basic : Rs 25,000
DA : Rs 15,000
Transport Allowance : Rs 1,500
Apart from the above, Hitesh is also provided with 2 housemaids for whom a monthly salary of
Rs 2,000 each is paid. His entire domestic expenditure pertaining to gas and electricity was fully
met by his employer. This expenditure amounted to Rs 5,000 p.m on an average. 2 of his children
are given education in a school owned and maintained by his employer. Cost of similar education
in the locality would cost a minimum of Rs 15,000 p.a per child.
Solution:
Basic
Allowances (25,000*12) 3,00,000
DA (15,000*12) 1,80,000 Transport allowance (Note 1) (1,500*12) 18,000
Less Exempted allowance Perquisites
(800*12) 9,600 8,400
Housemaid Note 2 (2,000*2*12) 48,000
Gas and electricity Note 2 (5,000*12) 60,000
Children's educational facility Note 2 (15,000*2) 30,000
Gross salary 6,26,400
Note:
1 Transport allowance is exempt @ Rs 800 p.m 2 Since Mr Hitesh is a specified employee (annual monetary receipts exceed Rs 50,000), benefits
of housemaids, gas, electricity and educational facility are fully taxable. Value of taxable
perquisite will be the cost of the facilities to the employer.
3 Assumed that Mr Hitesh was in employment for the entire previous year
3.3.3 Tax Free Perquisites – For all employees
• Medical Facility or reimbursement:
ƒ Discussed under taxation of medical benefits
• Food and Beverages provided to an employee:
ƒ Food or beverage provided in office or factory premises
ƒ Provided through Non-Transferable vouchers usable only in eating joints
• Recreational facilities provided to a group of employees (not restricted to a selected few)
• Loans to employees:
ƒ Loan does not exceed Rs 20,000
ƒ Loan given for specified medical treatment. However no exemption is available if the
loan for medical treatment has been reimbursed under any medical insurance scheme.
• Perquisites provided outside India by Government to its employees, who are citizens of India,
rendering services outside India – Sec 10(7)
• Training expenditure on employees.
• Rent free residence and conveyance facility provided to a judge of High Court or Supreme Court
• Rent free furnished accommodation provided to officers of Parliament, Union Minister or
Leader of Opposition.
• Accommodation in a Remote area (explained under valuation of perquisites)
• Educational facility for children where the facility, is owned by the employer or is provided by
virtue of his employment and the value of such facility does not exceed Rs 1000 pm
• Use of health clubs, sports facility etc provided by the employer if facilities are uniformly
available to all employees.
• Use by employee or any member of his household of laptops and computers owned or hired
by the employer
• Telephone expenses actually incurred.
• Employers contribution to deferred annuity, pension and staff group scheme
• Leave Travel Concession to the extent specified
• Accident Insurance policy premium
• Tax paid by the employer on the value of non monetary perquisites of the employee shall be exempt
u/s 10(10CC). There shall be no tax liability on such tax paid on behalf of the employee as non
monetary perquisite- RBF Rig Corpn vs ACIT – 2007 165 Taxman 101(Delhi). For example, if
Mr Ram receives Rs 12 lacs as salary including non monetary benefits and his company pays a
sum of Rs 50k as tax on non monetary perquisites on behalf of Mr Ram, the total taxable salary of
Mr Ram shall be Rs 12 lacs only and not Rs 12.5 lacs (Rs 12 lacs plus Rs 50k).
• Motor car provided to a non specified employee including the expenses incurred in this behalf
on employee‟s car.
• Amount given by employer to employee’s child as scholarship is exempt u/s 10(16).
Notified perquisites paid both to serving Chairman and members of Union Public
Service Commission
3.4 Valuation of Perquisites- Rule 3 (Notification no 94 dated 18-12-2009)
Valuation is one of the most important topics of this chapter. You can expect comprehensive
problems based on this topic. Perquisites, as we are aware, are non monetary benefits, however,
income tax is a tax on financial rewards earned by an employee. To quantify non monetary benefits
in monetary terms we have Rule 3 which provides for the rules of valuation.
Following are the perquisites for which valuation norms have been specified vide Rule 3:
i. Accommodation provided by the employer
ii. Fringe Benefits taxable in the hands of the employee
iii. Valuation of fringe benefits where the employer is not liable for fringe benefit tax
iv. Medical Expenses
v. Leave Travel Concession
vi. Life insurance premium/ deferred annuity etc paid by the employer
vii. Employee Stock Option Plans (ESOP)
Let us now look into each of the above perquisite in detail:
3.4.1 Accommodation provided by the employer- Rule 3(1)
This category of perquisite can be studied as follows:
A. Rent free or concessional accommodation
B. Accommodation in a hotel
C. Accommodation in a Site or Remote area
D. Accommodation on transfer .
3.4.1.a Rent free accommodation or accommodation provided at concessional rates:
• Accommodation provided to Government employees (employees of Union or State Government):
Unfurnished Accommodation Furnished Accommodation License fee:
Less: Rent recovered
Value of taxable perquisite
License fee:
Add: 10% of the cost of assets
Add: Actual hire charges
Less: Rent recovered
Value of taxable perquisite
License fee shall be the value determined by the Government. Students please note, this
value will be explicitly given in the question.
In the case of any other employee:
Type of
Accommodation Population of the city, as per 2001 census, where accommodation is provided
Exceeds 25 lacs Between 10 lacs and 25 lacs Upto 10 lacs
Owned by employer 15% of salary 10% of salary 7.5% of salary
Leased/rented by
the employer Actual lease/rent paid by the employer or 15% of salary-
Whichever is lower
Meaning of Salary:
Salary = Basic + DA taken for retirement benefits + Bonus + Commission + Fees + All
Taxable Allowances + All Taxable Monetary Payments.
However it excludes:
• Employer‟s contribution to Provident Fund
• Allowances exempt from Tax
• Value of Perquisites.
Note: Salary shall be computed on accrual basis for the period for which the accommodation is
occupied by the employee.
- Where salary is received from more than one employer, salary from all the employers shall be taken
into consideration even though the accommodation is provided by one of the employers.
- Monetary payments which are in the nature of a perquisite shall not form par t of salary as all perquisites
shall be excluded.
- Salary formula/definition is common for all accommodation perquisites like hotel accommodation and
accommodation on transfer.
Where the accommodation is provided by Central Government or State Government to an employee who
is serving on deputation with any body or under taking under the control of such Government:
- The employer of such employee shall be deemed to be that body or under taking where the employee
is serving on deputation, and
- The value of perquisite of such an accommodation shall be computed as if such accommodation is
owned by the employer.
Inserted by notification no 94/2009 dated 18th December 2009.
Where accommodation is provided by BSNL to Central Government employees on deputation to BSNL,
which is a public sector company controlled by Central Government, it was held that for the purpose
of computing perquisite value of housing accommodation, rules prescribed for employees of BSNL
(non Government employees) shall have to be considered – V.Surendran vs CBDT (2009) 182 Taxman
211(Ker).
Assessee's employer had incurred heavy expenses towards repairs and renovations of leased accommodation
occupied by assessee. The Assessing Officer held that said expenditure was perquisite under section 17(2)(iv)
since it was incurred to suit requirements of employee and it had nothing to do with performance of his duties. It
was held that it is not permitted to deviate from prescribed method as stipulated in Rule 3 for computing value of
rent free accommodation after renovation – Scott R. Bayman Vs CIT [2012] 24 taxmann.com 214 (Delhi)
• The above value of perquisite shall be reduced by the amount of rent recovered from the
employee.
• Where the question is silent on whether the city has a population in excess of 10 lacs or
otherwise, please make a suitable assumption and proceed with the solution.
• Where furnished accommodation is provided by the employer, the following amounts shall be added
to the value of perquisites computed above:
• 10% of the cost of Furniture if owned by the employer
• Actual hire charges if the furnishings are taken on lease by the employer.
Solution:
X is entitled to a salary of Rs. 25,000 per month He is given an option by his employer either to take
house rent allowance (HRA) or a rent-free accommodation which is owned by the company The
HRA amount payable is Rs.5.000 per month. The rent for the hired accommodation is Rs. 6,000
per month at new Delhi. Advice X whether it would be beneficial for him to avail HRA or rent free
accommodation Give your advice on the basis net take home cash benefits
Computation of most favourable option for Mr X
Particulars Rent free accommodation HRA
Salary 3,00,000 3,00,000 Value of Taxable Perquisite (WN 1) 45,000 0
Taxable HRA (WN 2) 0 18,000
Total Taxable Salary 3,45,000 3,18,000
Tax Liability (WN 3) 17,000 14,210
Total Cash Received from the Employer
Particulars Rent Free Accommodation HRA
Salary 3,00,000 3,00,000
HRA 0 60,000
Less Tax Liability 17,000 14,210
Net Take home pay 2,83,000 3,45,790
Less Rent Payable 72,000
Net Cash inflow 2,83,000 2,73,790
Based on the above computation, it is suggested that Mr X should opt for a rent free accommodation
as the net cash inflow is higher in this option
Working Note 1 - Value of Rent Free Accommodation
Salary
3,00,000
Value of taxable perquisite @ 15% 45,000
Working Note 2: Computation of Taxable HRA
Actual HRA
60,000
Rent Paid - 10% Salary 42,000
50% Salary 1,50,000
Exempted HRA (Least of the above) 42,000
Total HRA 60,000
Taxable HRA 18,000
Working Note 3: Computation of Tax Liability
Tax Slab
First Rs 1,80,000
Balance @ 10%
Rent Free Accommodation
Nil
16,500
HRA
Nil
13,800
Total Tax 16,500 13,800
Add Cess @ 3% 495 414
Total Tax liability (rounded off) 17,000 14,210
Illustration 6
Mr Sebin is working with Kotak Mahindra for the past 4 years. His monthly emoluments include
the following:
Basic : 25,000
DA (50% taken for retirement) : 10,000
Uniform Allowance : 5,000
This apart, Mr Sebin is also provided with accommodation at the company‟s own guest house at
Chetpet (Chennai). The property is owned by the company and its fair rental value is Rs.60,000 p.a.
The property is fully furnished with furniture costing Rs 5 lacs and with ACs taken on rent @ Rs
20,000 p.m. Entire Uniform Allowance was spent for the purpose. Compute taxable salary. Would
your answer be different if the property was taken on lease by the company at the fair rental value?
Solution:
Case 1: Property owned by the company
Computation of Income under the head Salaries:
Basic
Allowances
DA
(25,000*12)
(10,000*12)
3,00,000
1,20,000
Uniform allowance (Note 1)
Perquisites
Rent free furnished accommodation
WN 1
Nil
3,44,000
Gross salary 7,64,000
Working Note 1 Computation of rent free furnished accommodation Rent free un furnished accommodation (WN 1A) 54,000
Add Value of furnishings (WN 1B) 2,90,000 Value of Rent free furnished accommodation 3,44,000
Working Note 1 A Computation of Rent free un furnished accommodation Value of taxable perquisite = 15% of Salary (15% of Rs 3,60,000)
= 54,000
Salary: Basic + DA (considered for retirement)+ Taxable monetary allowances and payments
= 3,00,000+60,000 = 3,60,000
Working Note 1 B Computation of value of furnishing Value of Furnishings : 10% of Actual cost of furniture + Actual hire charges
: 10% of Rs 5 lacs + Rs 20,000*12
: 2,90,000
Note 1 Uniform allowance is exempt to the extent spent.
2 Its assumed that Chennai had a population in excess of 25 lacs as per 2001 census
Case 2: Property is taken on lease by the company
Working Note 2: Computation of Rent Free Furnished Accommodation
Rent free unfurnished accommodation (WN 2A) 54,000 Value of furnishings (WN 1B) 2,90,000 (Same as Case 1) Value of rent free furnished accommodation 3,44,000
Working Note 2A: Computation of Rent Free Unfurnished Accommodation
Value of taxable perquisite = 15% Salary or Actual rent whichever is less
= Rs 54,000 or Rs 60,000 whichever is less
= 54,000
Salary : Basic + DA (considered for retirement)+ Taxable monetary allowances and payments
= 3,00,000+60,000 = 3,60,000 Since value of taxable perquisite is same, there would not be any change in gross salary.
3.4.1.b Accommodation provided by the employer in a hotel (applicable for all employees):
Value of perquisite shall be the least of the following:
• 24% of salary paid or payable for the period during which the accommodation was provided, or
• Actual hotel charges paid or payable.
Exception: Hotel accommodation shall not be taxable if
• Such accommodation is provided for a period not exceeding 15 days in aggregate, and
• Such accommodation is provided on an employee‟s transfer from one place to another.
Note 1: Where the hotel accommodation is provided for more than 15 days, say 20 days, only the
days in excess of 15 i.e. 5 days shall be charged to taxation on the above criteria.
Where the hotel bill includes charges for services which are an integral par t of the
accommodation, the entire value of the bill shall be considered as cost of accommodation.
However where such bill also includes separate charges for allied services like lunch,
laundry etc, such expenses shall be considered separately based on valuation rules prescribed- Circular
No 1/2010 dated 11-1-2010.
Accommodation provided during business travel is not a taxable perquisite.
Illustration 7
Mr. Nimish an employee of Citigroup has been transferred from Mumbai to Pune. Due to his
transfer, Nimish was temporarily given accommodation in a hotel for a period of 20 days. He was
placed in Hotel Grand Hyatt where his daily rental was Rs 10,000. Nimish was the Vice President
of his company and is drawing a monthly Salary of Rs 1.50 lacs.
Solution:
Value of Taxable perquisite : Actual hire charges or 24% of salary
(Whichever is less) in excess of 15 days for the relevant period
: lower of Rs 50,000 or Rs 6,000(W.N.1)
: Rs 6,000
Working note 1: Computation of salary for the relevant period
Total Period of Stay 20 days
Less Exempted Period 15 days
Taxable period of Stay 5 days
24% Salary for the relevant period @ Rs 1.50 lacs p.m Rs 6,000
(Rs 1,50,000*5/30*24%) Note:
Actual Hire charges for 5 days @ Rs 10k per day Rs 50,000
• Number of days in excess of 15 days only will be considered for valuation.
• It‟s assumed that salary given is salary (as defined) for the purposes of valuation.
3.4.1.c Accommodation provided at certain sites or in a remote area:
Accommodation provided by the employer shall be tax free if such accommodation is provided to
an employee working at either of the following:
• Mining site
• On shore oil exploration site
• Project execution site
• Dam site
• Power generation site
• Off shore site
The above accommodation shall be exempt from taxation provided such accommodation is:
ƒ Temporary in nature and having a plinth of not more than 800 sqft and located not less than 8
kms from local limits of any municipality or cantonment board, or
ƒ Located in a remote area i.e an area located at least 40 kms away from a town having a
population not exceeding 20,000.
3.4.1.d Accommodation provided at a new place of posting on transfer while retaining
accommodation at the earlier place of work:
• Where on transfer
• An employee is provided with an accommodation at the new place of posting retaining the
accommodation at his earlier place of work
• For a period not exceeding 90 days
• Value of taxable perquisite shall be only one such accommodation (accommodation with the
lower value).
• Beyond 90 days value of perquisite shall be for both such accommodations.
3.4.2 Valuation of Fringe Benefits
Fringe Benefits for the purpose of valuation include:
ƒ Interest free loans or concessional loans
ƒ Use of movable assets
ƒ Transfer of movable assets
ƒ Other Fringe Benefits
3.4.2.a Interest free loans or loans at concessional interest - Rule 3(7)(i):
The value of any benefit resulting from loans given to employees or any member of his household
during the relevant previous year by the employer shall be a taxable perquisite.
Value of taxable perquisite can be viewed under two circumstances namely:
- Where there is principal repayment
Sum of Maximum monthly * (Bench mark rate – Interest outstanding Value of Taxable Perquisite
outstanding balances recovered from employee) ------------------------------------------------------------------------------------
12 months
The above formula is applicable in cases where there is principal repayment of loan during the
previous year.
Bench mark is the rate charged by SBI on similar loans (Housing loan, car loan etc) as
at the beginning of the previous year i.e on 1st of April of the relevant previous year. Any
subsequent revision in rates by SBI will not have impact on tax calculations.
STATE BANK OF INDIA : INTEREST RATES
Interest Rates charged by State Bank of India as on 1st April, 2012 (applicable for AY 2013-14) on various loans
in Personal Segment advances used for the purpose of computing perquisite valuation are as under:
HOME LOANS
Upto
Rs.30 lakhs Rs. 30 lakhs
to Rs. 75 lakhs Above Rs.75
lakhs
Interest rate during 1styear 10.75% 11% 10.00%
EDUCATION LOANS
Upto Rs. 4
lakhs Rs. 4 lakhs
to Rs. 7.5 lakhs Above Rs 7.5
lakhs Concession for
Girl Students
SBI Student Loan 13.5% 13.25% 12% 0.50%
Car Loan Two wheeler Loan Personal Loan
12% 18.25% 18.5%
- Where there is no principal repayment during the previous year:
Value of taxable
perquisite
Loan Value * (Bench Mark rate – Interest recovered) * Number of months for which the loan was outstanding ---------------------------------------------------------------------
12 months
• Member of household shall include:
ƒ Spouse(s)
ƒ Children and their spouses
ƒ Parents
ƒ Servants and dependants
• Where the loan is given interest free by the employer, interest recovered will be taken as Nil for
calculation and the entire Bench Mark rate will be considered for valuation of perquisites.
• Value of perquisite shall not include interest on the following loans:
ƒ Where the loan is given for medical treatment of specified diseases given under Rule 3A.
However exemption is not applicable to so much of the loan as has been reimbursed to the
employee under any medical insurance scheme
ƒ Where the original loan value does not exceed Rs 20,000 in aggregate
• Where loan was granted by a bank to its employee at a rate lower than the bench mark rate of
State Bank of India, such a loan would be regarded as a concessional loan and charged to
taxation as a perquisite. The fact that the cost of funds for the bank was lower than the benchmark
rate would be considered for the purpose of perquisite valuation- All India Punjab National Bank
Officer’s Association vs Chairman cum Managing Director, Punjab National Bank (2010) 190
Taxman 221 (MP).
Specified diseases under Rule 3A shall mean:
- cancer;
- tuberculosis;
- acquired immunity deficiency syndrome;
- disease or ailment of the heart, blood, lymph glands, bone marrow, respiratory system, central
nervous system, urinary system, liver, gall bladder, digestive system, endocrine glands or
the skin, requiring surgical operation including ailment or disease of the organs specified,
requiring medical treatment in a hospital for at least three continuous days;
- ailment or disease of the eye, ear, nose or throat, requiring surgical operation;
- fracture in any part of the skeletal system or dislocation of vertebrae requiring surgical
operation or orthopaedic treatment;
- gynaecological or obstetric ailment or disease requiring surgical operation, caesarean
operation or laperoscopic intervention;
- gynaecological or obstetric ailment or disease requiring medical treatment in a hospital for
at least three continuous days;
- burn injuries requiring medical treatment in a hospital for at least three continuous days;
- mental disorder - neurotic or psychotic - requiring medical treatment in a hospital for at least
three continuous days;
- drug addiction requiring medical treatment in a hospital for at least seven continuous days;
- anaphylectic shocks including insulin shocks, drug reactions and other allergic manifestations
requiring medical treatment in a hospital for at least three continuous days.
X has taken an interest-free loan of Rs.10 lakh from his employer-company. The
amount is utilized by him or purchasing a house on June 30, 2010. The house is self-
occupied. As per the scheme of the company, loan would be recovered in 40 equal
monthly installments recoverable immediately after the completion 18 month from the
date of purchase. The SBI lending rate of similar loan on April 1, 2012 is 10.75 per cent.
Calculate the perquisite value of such loan in the hands of X for the assessment year 2013-14. Is
it possible to get deduction of perquisite value of interest under section 24(b)? Does it make any
difference, if the house is given on rent?
Solution:
Last day of each month Maximum outstanding
balance
April 30,2011
May 31,2011
June 30,2011
July 31,2011
August 31,2011
September 30,2011
October 31,2011
November 30,2011
December 31,2011
January 31,2012
February 28,2012
March 31,2012
Rs.
10,00,000
10,00,000
10,00,000
10,00,000
10,00,000
10,00,000
10,00,000
10,00,000
10,00,000
9,75,000
9,50,000
9,25,000 Sum of monthly outstanding
balances
1,18,50,000
Value of perquisite = [Sum of maximum monthly outstanding balances * / 12 (benchmark rate-rate
recovered)]
= 11850000/12*10.75%
= Rs 1,06,156.25
It is not possible to claim perquisite value of interest as deduction under section 24 since there is
no interest payment being made to the employer. Also similar to sec 49(4) or 49(2AA), there is no deemed
payment provision available for notional interest benefit on loans which have been charged u/s 17.
If a closely held company gives a loan to an employee who holds at least 10% voting power,
such loan is deemed as dividend u/s 2(22)(e) provided the conditions prescribed are fulfilled.
Even in such a case, the perquisite value of interest free loan is chargeable to tax – CIT vs
T.P.S.H Selva Saroja (2003) 131 Taxman 1 (Mad)
Illustration 8
Mr Lokesh is working with ICICI as a Senior Sales manager drawing a monthly salary of Rs
45,000. On 1st of May, he took a housing loan from his employer for purchasing his house at a
total cost of Rs 30 lacs. 50% of the cost was funded through loan @ 7% while the market rate (SBI
rate) was @ 10.75%. Determine the value of taxable perquisite assuming:
• There is no principal repayment
• He repays a sum of Rs 15,000 at the end of every month towards principal.
Solution:
Case 1: No principal repayment
Loan Value * (Bench Mark rate – Interest recovered) * Number of months for which Value of taxable
perquisite
the loan was outstanding -------------------------------------------------------------------------------------------------
12 months
: Rs 15lacs (10.75%-7%)*11months/12 months = Rs 51,563
Case 2: Monthly repayment of Rs 15,000 towards principal
Sum of Maximum monthly * (Bench mark rate – Interest outstanding Value of Taxable Perquisite
balances recovered from employee) --------------------------------------------------------------------------------
12 months
: Rs 15675000* (10.75%-7%)/12 months = Rs 48,984
Computation of maximum monthly outstanding balances:
Month Maximum monthly
outstanding balances May 15,00,000 June 14,85,000
July 14,70,000
August 14,55,000
September 14,40,000
October 14,25,000
November 14,10,000
December 13,95,000
January 13,80,000
February 13,65,000
March 13,50,000
Total 1,56,75,000
3.4.2.b Use of movable Assets by an employee or a member of his household – Rule
3(7)(vii):
Assets used Value of Taxable Perquisite
Laptops and computers Nil
Assets other than laptops, computers and
those specified in rules 10% p.a of the actual cost if the asset is
owned by the employer
Or
Actual rent paid or payable by the employer
1. Any amount recovered from the employee shall be reduced from the above value.
2. Motor cars shall be valued in accordance with Rule 3(2A).
3.4.2.c Transfer of any Movable Assets directly or indirectly to an employee or a
member of his household – Rule 3(7)(viii):
Value of Taxable Perquisite: Fair market value of asset less Amount recovered from the
employees.
Assets transferred Value of Taxable Perquisite
Computers and
electronic items Actual cost (-) 50% depreciation for each completed year of use under
reducing balance method Less amount recovered from employee Motor car Actual cost (-) 20% depreciation for each completed year of use under
reducing balance method Less amount recovered from employee Any other Asset Actual cost (-) 10% depreciation for each completed year of use under
straight line method Less amount recovered from employee
3.4.2.d Other Fringe Benefits– Rule 3(7):
Rule Benefit Situation Value of taxable
perquisite
3(7(ii)
Travelling, tour and
accommodation expenses
of employee and his
family reimbursed by
employer other than leave
travel concession specified
under Rule 2B
Facility is maintained by the
employer and is not uniformly
available to all employees
Value of similar facility
offered by other
agencies Employee is on a official tour
and expenses are incurred for
any member of household
accompanying him
Actual expenditure
incurred for such
member of household
Official tour is extended to
vacation Actual cost of such
extended vacation In any other case Actual amount
reimbursed
3(7)
(iii) Free food and non
alcoholic beverages Tea and snacks provided during
working hours Nil
Free food and non alcoholic
beverages provided during
working hours in:
- Remote area
- Off shore location
Nil
Free food and non alcoholic
beverages provided during
working hours:
- In office or business premises
- Through non transferrable
vouchers usable only at eating
joints
Nil, if the value in either
case does not exceed Rs
50 per meal
In any other case Actual amount incurred 3(7)
(iv) Gift, voucher or token
received
Caveat:
Students please note, if
the value of gifts received
in aggregate is Rs.5000 or
more, the entire amount
shall be considered as
taxable perquisite.
Where the aggregate value of
such gifts, token or voucher is
below Rs 5000 per annum
Nil
In any other case Actual value of such
gifts received
3(7)
(v) Expenses on credit cards
including add on cards.
Expenses for this purpose
shall include membership
and annual fees.
Where such expenses are wholly
and exclusively for official
purposes
Nil- provided the
conditions in Note
below are fulfilled In any other case Actual amount
reimbursed/paid by the
employer 3(7)
(vi) Club membership and
expenses in a club
Where the employer
has obtained corporate
membership of the club
and the facility is enjoyed
by the employee or any
member of his household,
the value of perquisite
shall not include the initial
fee paid for acquiring such
corporate membership.
Where such expenses are wholly
and exclusively for official
purposes
Nil- provided the
conditions in Note
below are fulfilled In any other case Actual amount
reimbursed/paid by the
employer
3(6) Free or concessional journey
for employees and their
family where the employer
is engaged in carriage of
passengers or goods.
Where employer is an
airline or railways Nil
In any other case Value at which such facility is
provided to general public 3(7)
(ix) Any other benefit, amenity,
right, privilege or service Arm‟s length price or fair market
value of such benefit or facility
Note:
- Conditions for claiming expenses as wholly official in nature:
ƒ Complete details including the date and nature of the expenditure is maintained
ƒ Employer should give a cer tificate to such effect.
- Any amount recovered from employees shall be reduced from the value arrived above.
- There shall be no perquisite for use of health club, spor ts and similar facilities provided uniformly to all
employees.
- Where the employer has obtained corporate membership in a club and the facility is enjoyed by the employee
and his family, value of the initial fee paid for membership shall not be considered as perquisite.
No perquisite in case of expenses on telephone or mobile incurred for official purposes.
If the company has provided money to an officer to purchase the club membership and if the
subscription and the amount incurred by the officers for their personal benefit is reimbursed
by the company, such amounts spent by the officers of the company can not be considered
as business promotion expenses in such event, that would fall under section 17(2)(iv) – CIT vs Wipro
Systems (2010) 325 ITR 234 (Kar).
3.4.3. Valuation of Motor Car as a Perquisite – Rule 3(2) – Taxable only for Specified
Employees – As amended by notification no 94/2009 dated 18th December 2009.
Car owned
or hired by: Maintenance
expenses met by Purpose of
the car Engine capacity does
not exceed 1.6 litres Engine capacity
exceeds 1.6 litres
Employer
Employer
Official Nil – subject to relevant documents being
maintained
Employer
Personal Actual maintenance expenses + Salary to
Driver + 10% of the cost of the car
Employer
Partly official
and partly
personal
1,800 p.m+ 900 p.m if
driver is provided 2400 p.m+ 900 p.m if
driver is provided
Employee 600 p.m+ 900 p.m if
driver is provided 900 p.m+ 900 p.m if
driver is provided
Employee
Employer
Official Nil – subject to relevant documents being
maintained
Employer
Partly official
and partly
personal
Actual expenditure
less (1800 p.m+
900 p.m if driver is
provided)
Actual expenditure less
(2400 p.m+ 900 p.m if
driver is provided)
A higher deduction in excess of Rs 1800/ 2400 can be claimed subject to maintenance of specified
documents.
Apart from motor car, if any other vehicle is provided by the employer, value of taxable perquisite
shall be computed in the following manner
Vehicle owned
or hired by: Maintenance
expenses met by Purpose of
the vehicle Value of taxable perquisite
Employer
Employer
Official Nil – subject to relevant documents being
maintained Partly official
and partly
personal
Actual expenditure less Rs 900 p.m. A
higher deduction can be claimed subject
to maintenance of relevant documents
- Where more than one car is provided to an employee (otherwise than for exclusive
official purposes):
ƒ Consider one as being used for par tly official and par tly
personal
ƒ All other cars shall be considered as if they are entirely used for personal purposes
- Specified documents to be maintained:
o Employer shall maintain complete details of journey under taken for official purposes including:
ƒ Date of journey
ƒ Destination
ƒ Mileage
ƒ Expenditure incurred
o Cer tificate from the employer to such effect.
- The use of an official vehicle from office to residence and vice versa shall not be regarded as a benefit
to employees and hence exempt from taxation.
- Conveyance facility provided to judges of High Cour t and Supreme Cour t are exempt from taxation.
Where a car is owned by the employee, maintenance is met by the employer and the car is
used for personal purposes, expenses reimbursed shall be categorized as “obligation of an
employee met by the employer” and shall hence be taxable for all categories of employees.
Any amount recovered from an employee shall be reduced from the value of taxable perquisites.
Illustration 9
Mr Arnab is working with Now News Channel as a Chief Editor drawing a monthly remuneration
of Rs 2 lacs. Apart from salary Mr Arnab also received/used the following assets. Compute his
total taxable salary income.
• 2800 CC Audi A 4 car, worth Rs 65 lacs.
• Sony VAIO laptop worth Rs 2 lacs. This lap top was used by him till 1st June after which it was
sold to him for Rs 50,000. The laptop was purchased on 30th May last year.
• Teakwood sofa used at his own residence: worth Rs 1 lac. He also received a Bose Music
System worth Rs 2 lacs for usage at his residence.
• 2 Daikin Air conditioners taken on a consolidated monthly rent of Rs 15,000.
• His kitchen was furnished with Modular cabinet fittings at an overall outlay of Rs 5 lacs. The
entire expenditure was borne by the company and the asset is recorded in its books as part of
fixed assets.
• He acquired a Mercedes SLK for Rs 5 lacs. The car was used by the company for 2 years and
was purchased for Rs 50 lacs.
• His son was given an HP personal computer worth Rs 50,000 for personal use.
• 2 watchmen on a monthly salary of Rs 5,000 each.
Solution:
Computation of Income under the head Salaries of Mr Arnab
Base Salary (Rs 2 lacs*12) 24,00,000
Perquisites
Motor Car WN 1 28,800
Use of Movable Assets WN 2 2,60,000
Transfer of Movable assets WN 3 27,50,000
Watchmen WN 4 1,20,000
Gross Salary 55,58,800
Note 1: Motor car & Watchman are taxable perquisites in the hands of specified employee.
Working note 1 - Computation of value of taxable perquisite - Motor car
Engine capacity of the car 2,800 cc
Monthly value of taxable perquisite 2,400
Annual value of taxable perquisite 28,800
Note: It is assumed that the car is used for both official and personal purposes.
Working Note 2- Use of Movable Assets
A Sony Laptop and HP computer used are not a taxable perquisites
B Particulars Value of Asset Perquisite @ 10% on cost
Teak Wood Sofa 1,00,000 10,000
Music System 2,00,000 20,000
Modular Kitchen Cabinet 5,00,000 50,000
Add Hire Charges for Air conditioners @ Rs 15,000 p.m 1,80,000
Value of taxable perquisite 2,60,000
Working Note 3- Transfer of Movable Assets
Asset Value of Perquisite
Laptop (WN 3A) 50,000
Mercedes SLK (WN 3B) 27,00,000
Total value of taxable perquisite 27,50,000
Working Note 3A - Transfer of Laptop
Purchase Price
Number of completed years of use
Rate of Depreciation
2,00,000
1 year
50% written down value
Total Depreciation 1,00,000
Written down Value 1,00,000
Less Amount Recovered from the employee 50,000
Value of Taxable perquisite 50,000
Working Note 3B - Transfer of Mercedes SLK
Purchase Price 50,00,,000
Number of completed years of use 2 year
Rate of Depreciation 20% written down value
Depreciation
1st year (20% of 50,00,000)
10,00,000
2nd year Depreciation 8,00,000
(Rs 50 lacs - 1st year
depreciation)*20%
Total Depreciation 18,00,000
Written down Value 32,00,000
Less Amount Recovered from the employee 5,00,000
Value of Taxable perquisite 27,00,000
Working Note 4 - Provision of Watchmen
Total number of watchmen 2
Monthly salary paid for each 5,000
Total value of taxable perquisite 1,20,000
3.4.4 Medical Expenses- Proviso to Sec 17(2)
Incidence of taxation on medical expenses incurred by the employer can be classified in to two
categories as follows:
• Medical treatment in India
• Medical treatment outside India.
Let‟s now look into these classifications in some detail:
3.4.4.a Medical Treatment in India:
In the case of medical treatment expenses within India, the following expenses shall be treated as
tax free perquisites:
• Value of any medical treatment provided to an employee or a member of his family in any
hospital maintained by the employer.
• Any sum incurred by the employee towards his medical treatment or that of any of his family
members in any hospital, clinic or otherwise up to Rs 15,000 per annum. In other words,
reimbursement of medical expenditure up to Rs 15,000 per annum is tax free.
• In the following cases expenses incurred by the employer on the medical treatment of his
employee and his family members shall be fully tax free:
ƒ Actual expenditure incurred in any hospital maintained or approved by the Government
or any local authority
ƒ Expenditure incurred towards treatment of diseases prescribed under Rule 3A like cancer,
AIDS, tuberculosis, treatment for drug addiction etc.
• Health insurance premium paid by the employer under an approved health insurance
scheme.
• Reimbursement of health insurance premium paid under an approved insurance scheme for
the benefit of employee and his family.
3.4.4.b Medical Treatment outside India:
In the case of medical treatment expenses outside India, the following expenses shall be treated
as tax free perquisites subject to the conditions prescribed:
Expenditure Description /Situation Taxability
Treatment
Expenses Expenses on medical treatment provided to an
employee or a member of his family outside
India
Exempt to the extent
permitted by Reserve
Bank of India (RBI) Accommodation
Expenses Expenses on stay abroad of the employee or
any member of his family together with one
attendant in connection with such treatment
Exempt to the extent
permitted by Reserve
Bank of India (RBI) Travel expenses of
the patient together
with an attendant
Where gross total income of the employee,
before the inclusion such travel expenditure
as perquisite does not exceed Rs 2,00,000
Fully exempt
In any other case Fully taxable
• Family for the purposes of medical treatment shall mean:
• Spouse
• Children – may be dependant or independent/ married or unmarried
• Parents, brothers and sisters who are wholly or mainly dependant on such employee
• Any medical allowance shall be fully taxable.
• Expenditure on medical treatment by the employer may be by way of payment or reimbursement –
Circular No 603 dated 06-06-1991.
From the following data, you are required to calculate the perquisite value of the expenditure
on medical treatment, which is assessable in the hands of the employee of a company,
inclusive of the conditions to be satisfied:
Gross total income Inclusive of salary
Rs.
2,00,000 (1) Amount spent on treatment of the employee‟s wife in a hospital
maintained by the employer
10,000 (2) Amount paid by the employer on treatment of the employee‟s child in a hospital
(3) Medical insurance premium reimbursed by the employer on a policy
Covering the employee, his wife and dependant parents.
5,000
8,000
(4) (a) Amount spent on medical treatment of the employee outside India 1,50,000 (b) Amount spent on travel and stay abroad 1,00,000
(5) Amount spent on travel and stay abroad of attendant 50,000
Solution:
Situation Tax implication
(1) Amount spent on treatment of the employee‟s wife in a hospital
maintained by the employer Not taxable
(2) Amount paid by the employer on treatment of the employee‟s Not taxable as it does not
child in a hospital exceed Rs.15,000
(3) Medical insurance premium reimbursed by the employer on a policy
covering the employee, his wife and dependant parents. Not taxable
(4 Amount spent on medical treatment of the employee outside India Not taxable (note)
(5) Amount spent on travel and stay abroad Not taxable (note)
(6) Amount spent on travel and stay abroad of attendant Not taxable (note)
Note: It is assumed that the expenditure outside India is permitted by the Reserve Bank of India. Also
applicants gross total income does not exceed Rs 2 lacs.
Illustration 10
Mr Shenoy working for SDTV has a family which is, unfortunately, full of sick people. During
the year he received the following medical benefits from his employer:
• Reimbursement of medical expenses for treatment of his spouse: Rs 45,000. His spouse
suffered from chronic tuberculosis.
• His uncle (father‟s brother) was treated for renal failure at Apollo Hospital at a total outlay of
Rs 25,000. The entire sum was reimbursed by the employer .
• His father is an insulin dependant diabetic for whom a monthly sum of Rs 5,000 was incurred
for treatment. This sum was also reimbursed by the company. His father is a retired service
man drawing a monthly pension of Rs 1,500.
• His second son suffered from brain tumor for which treatment was available only at the
US. His son and his mother flew down to the US for the treatment and the total expenditure
incurred is as follows:
- Travel Rs 2 lacs
- Treatment Rs 4 lacs (RBI limit Rs 5 lacs)
- Stay Rs 2.55 lacs (RBI limit Rs 2.50 lacs)
• His sister who is unemployed – is suffering from Cancer. She was given treatment in a hospital
owned by SDTV. Cost of similar treatment elsewhere is Rs 4 lacs.
• His mother was treated in a Government hospital for arthritis and the entire cost of Rs 30,000
was borne by the employer. His mother is an IAS officer drawing 2 times his monthly salary.
Discuss the taxability of the above perquisites assuming his salary income is:
- Rs 1,00,000
- Rs 50,000
- Rs 95,000
Solution:
Medical Benefit Tax Incidence Value of Taxable
Perquisite Reimbursement of
treatment expenses of
spouse for Tuberculosis
Fully exempt: Treatment for a specified disease Nil
Reimbursement of
expenditure incurred for
his uncle
Amount reimbursed will be fully taxable: Uncle
is not a member of house hold for tax purposes Rs 25,000
Reimbursement of
medical expenditure of
father
Exempt upto Rs 15,000 p.a while the balance is
fully taxable as a perquisite.
Note: It is assumed that his father is fully
dependant on Mr Shenoy. His pension is
considered as insufficient for his survival.
Rs 45,000
(Rs 5,000*12 –
Rs15,000)
Treatment to
unemployed sister Treatment for specified diseases to any member
of household is fully exempt.
Note: Assumed that sister is fully dependant on
Shenoy
Nil
Treatment to mother Entire expenditure of Rs 30,000 is fully taxable
as she is not dependant on the assessee. Rs 30,000
Treatment for son
abroad Foreign treatment and stay expenses are exempt
to the extent permitted by RBI.
Treatment expenditure: Fully exempt
Stay Expenses : Rs 5,000 (2.55 lacs -2.5 lacs)
Rs 5,000
Value of Taxable perquisite excluding Foreign Travel Rs 1,05,000
Taxability of Foreign Travel Expenditure for Medical Treatment
Particulars Case 1 Case 2 Case 3
Salary Income apart from perquisites 1,00,000 50,000 95,000 Add Value of perquisite excluding foreign travel 1,05,000 1,05,000 1,05,000
Total 2,05,000 1,55,000 2,00,000
Add Foreign Travel Expenditure (Note) 2,00,000
Gross Salary 4,05,000 1,55,000 2,00,000
Note: Travel expenses of the patient together with one attendant are exempt provided gross total
income of the employee, before the inclusion of such travel expenditure as perquisite, does not exceed
Rs 2 lacs. Where gross total income exceeds Rs 2 lacs, the entire travel expenditure is fully taxable.
X Ltd., manufacturer of drugs and pharma products provides the following information relating
to payments made to its marketing manager during the previous year.
• Salary @ Rs. 20,000 per month.
• Motor-cycle purchased for Rs. 45,000 was given free of cost. The vehicle was used for 2
years by the company.
• Conveyance allowance of Rs. 5,000 per month which was allowed to him. It is informed that the entire
sum is towards office reimbursements which are eligible for full exemption u/s 10(14). as exempt under section
10(14).
• Tickets wor th Rs. 4000 for a cricket match between India and England.
• Reimbursement of medical expenses, incurred actually by him, of Rs. 17500.
The company asks you to compute the amount of income chargeable to tax in the hands of
marketing manager.
Solution
Computation of Taxable Salary
Salary @ Rs 20,000 pm 2,40,000
Add Motor Cycle given free of cost Note 1 36000
Conveyance Allowance Note 2 NIL
Tickets given free of cost Note 3 4,000
Reimbursement of Medical Expenses Note 4 2,500
Total Taxable Salary 2,82,500
Note
1 Since the motor cycle was given free of cost, the entire written down value i.e. Rs 45,000 less depreciation @ 10% per annum on straight line method being Rs 36,000, shall be regarded as value of taxable perquisite.
2 Conveyance allowance is exempt to the extent spent. It is assumed that the entire amount of Rs 5000 pm is spent by the employee.
3 Tickets given free of cost is regarded as an obligation of employee met by the employer. Hence fully taxable. Conversely if the same had been given as a gift- it would have been fully exempt since gifts upto Rs 5000 pa are not taxable.
4 Reimbursement of medical expenses is exempt upto Rs 15000 p.a. Hence the excess of Rs 2500 is chargeable to tax.
3.4.5. Leave Travel Concession- Sec 10(5) read with Rule 2B
An employee is entitled to exemption under this section in respect of the value of travel concession
or assistance received or due to him from his present/former employer, for himself and his family
in connection with:
• Travel to any place in India while on service
• Travel to any place in India after retirement or termination of service.
ƒ 1990-93
ƒ 1994-97 ƒ 1998-01 ƒ 2002-05 ƒ 2006-09 ƒ 2010-2013
The above exemption shall be subject to the following limits:
Mode of Journey Maximum Amount Exempt
Air Economy air fare of the National Carrier of the shortest route to the
destination Rail First class AC rail fare of the shortest route to the destination
Where the places
are not connected
by rail
Where a recognised public
transport system exists:
1st class or deluxe class fare on
such transport by the shortest
route
Where no recognised public transport
system exists:
1st class AC rail fare for the distance of
journey by the shortest route as if the
journey had been performed by rail
Frequency of claiming exemption:
• Twice in a block of 4 years: Assessee can claim the benefit of exemption in respect of any 2
journeys in a block of 4 calendar years. The 4 calendar year blocks are given as follows:
• If the assessee has not availed the exemption of LTC in a par ticular block whether both or one of the
journeys, he can claim the exemption in the 1st journey in the calendar year immediately succeeding
the end of the block. Assessee shall be allowed exemption on two additional journeys in the block.
• An employer is under no statutory obligation to collect evidence to show that its employees have
actually utilized the amount paid towards leave travel concession or conveyance allowance. It is
adequate compliance if the employer has received a declaration from the employee – CIT vs Larsen
and Toubro Ltd (2009) 181 Taxman 71 (Supreme Court).
• Family for this purpose includes:
1. Spouse
2. Children subject to a maximum of two children
3. Parents, brothers and sisters who are wholly or mainly dependant on the assessee
• Where LTC is encashed without performing journey the entire amount received shall be taxable.
• It is not necessary that family members should under take the journey along with the employee.
• Exemption is available only in respect of Air/Rail/Road fare. Any boarding and lodging expenses shall
not qualify for exemption.
• Where a circular journey say Chennai – Hyderabad – Mumbai – Chennai is performed, the maximum
exemption shall be for the shor test route between the place of origin (Chennai) and the far thest point
reached (Mumbai).
The restriction of two children shall not apply in the following circumstances:
• Where the children were born prior to 1st of October 1998, or
• In case of multiple bir ths after the first child i.e say twins after the 1st child in which case all the three
children will be eligible for exemption u/s 10(5).
Illustration 11
Mr Khetan is working with Yatra.com as senior manager marketing. During the year he made the
following trips:
• Trip to Malaysia for official purposes. Total expenses incurred was Rs 50,000.
• Holiday trip to Kerala with his spouse and 3 children during April. Mr. Kethan had twins after
his first child. Total travel expenditure incurred per member was Rs 20,000. This sum was
entirely reimbursed by the company. The trip was by air and the entire family travelled by
executive class which is twice the price of economy fares.
• Trip to Kashmir on February with his spouse for vacation. Total travel expenditure of Rs
45,000 was fully reimbursed by the company. Journey was by air at applicable economy fare.
Discuss the tax implications.
Solution:
Trip Tax Implication
Trip to Malaysia for
official purposes. Not taxable in the hands of employee
Holiday trip to Kerala
with his spouse and 3
children during April
Rs 10,000 per member i.e Rs 50,000 (for 5 members) will be charged
to taxation.
Note: Journey by air is exempt only to the extent of economy airfare
of a national carrier. Any amount beyond this would be charged to
taxation. In this case since the cost of travel through business class is
twice the economy fare- 50% of the total fare is charged to taxation. Trip to Kashmir on
February 07 with his
spouse for vacation.
Fully exempt – Refer Note below
Note: Leave travel concession is exempt twice in a block of 4 calendar years. In this case the assessee
had undertaken 2 trips in the same previous year falling in 2 calendar years. It‟s the assessee‟s option
to claim both these trips as exempt or claim the benefit for any other trip in future. In this case, it‟s
assumed that the assessee has claimed the exemption for both the trips undertaken.
3.4.6. Valuation of Life Insurance Premium/ deferred annuity premium paid/ payable by
the employer
• Premium paid by the employer is taxable on due basis
• Payment towards certain schemes like ESI, Fidelity guarantee scheme shall not be regarded
as perquisite as these are for the benefit of the employer.
3.4.7. Employee Stock Option Plans (ESOP)
This is one of the most important components of modern day salary structure. Recently we have
seen the ESOP component of a top honcho working for an MNC Energy Company in India
breach the Rs 100 crore mark. Companies are using ESOPs as a popular tool to curtail employee
attrition level and increase loyalty. ESOPs are schemes where an employee receives shares in his
employer company at a price which is significantly lower than the prevailing market price. Let us
take a brief look into how this perquisite in charged in the hands of an employee - As amended
by notification no 94/2009 dated 18th December 2009:
Valuation of ESOPs: For the purpose of perquisite taxation, fair market value of the shares or
security on the exercise date shall be considered. Fair market value on exercise date shall be
computed in the following manner:
• In case of shares listed in a recognised stock exchange:
Situation Share traded in only one
recognized stock exchange Share traded in more than one recognized
stock exchange Where the shares
are traded in the
exchange on the
date of exercise
Average of opening and
closing price in the stock
exchange on the date of
exercise
Average of opening price and closing price of
the share on the recognised stock exchange
which records the highest volume of trading
in the share on the date of exercise Where no shares
are traded in the
exchange on the
date of exercise
Closing price of the share
on any recognised stock
exchange on a date closest
to the date of exercising of
the option and immediately
preceding the exercise date
Closing price of the share on a recognised
stock exchange, which records the highest
volume of trading in such share, as on the
date closest to the date of exercising of
the option and immediately preceding the
exercise date.
• In case of unlisted shares : Fair market value shall be such value of the share in the
company as determined by a merchant banker on:
- The exercise date, or
- Any date earlier than the date of the exercising of the option, not being a date
which is more than 180 days earlier than the date of the exercising.
In case any other security is given (other than shares):
The fair market value of any specified security, on the date on which the option is exercised by the
employee, shall be such value as determined by a merchant banker on the specified date.
For the purpose of ESOP computation, valuation on the date of exercise is what is relevant.
Any information per taining to the value on the date of vesting shall be completely ignored in
examinations. Where the question gives you the value on the date of vesting but is silent on the
valuation on exercise date, make an assumption that the valuations on the date of exercise and vesting are
the same and proceed.
Cost of acquisition of shares/ securities acquired in a scheme of ESOP shall be the fair market value on
exercise date – Sec 49(2AA).
IT ltd. under its Employees Stock Option Plan (ESOP) allotted 500 equity shares to its finance
manager, C on May 15, 2012 when she exercised her option The option was granted on January
15, 2011 and the shares vested with C on January 15, 2012. The company‟s shares are quoted
in Bombay Stock Exchange where the opening price and closing price of the date of exercise of
option on May 15, 2012 were Rs. 250 and Rs. 256 respectively The company recovered Rs. 50
per share from C. Compute the taxable value of ESOP for the assessment year 2013-14.
Computation of Value of Taxable Perquisite
Fair Market value of shares on Exercise Date 1,26,500 (Average of Rs 250 and Rs 256 for 500 shares)
Less Amount recovered from Mr C (Rs. 50 per share for 500 shares) 25,000
Value of taxable perquisite 1,01,500
3.4.8 Contribution to Approved Superannuation Fund
Any contribution by an employer to an approved superannuation fund shall be chargeable to tax to the
extent it exceeds Rs 1 lakh per annum. It is taxable in the year in which the contribution is made.
3.4.9 Contribution to an Approved Gratuity Fund
Any contribution by an employer to an approved gratuity fund is exempt from tax. Actual payment
received by the employee is exempt from tax within the limits specified u/s 10(10).
3.4.10 Value of any other benefit, amenity etc provided by the employer – Rule 3(7)(ix)
Any other benefit or perquisite provided by the employer shall be considered as a perquisite.
Actual expenditure incurred by the employer less amount recovered shall be considered as value
of taxable service.
3.5 Profits in Lieu of Salary- Sec 17(3) Profits in lieu of salary refers to receipts from an employer which are rare, at times, non recurring
but are still regarded as income in the hands of the employee. Accordingly profits in lieu of salary
include:
i. Terminal compensation: Any amount due to or received by an employee, from his employer
or former employer at or in connection with the termination or modification of the terms and
conditions of employment.
ii. Balance in unrecognized welfare funds: Accumulated balance of employer‟s contribution to
unrecognized provident fund or unrecognized superannuation fund together with the interest
thereon shall be taxable on receipt.
These amounts are not taxed when the contribution is made by the employer. However interest on
employee‟s contribution is taxed as Income from Other Sources.
Employee‟s contribution to an unrecognized welfare fund shall not be taxable in the year of receipt/
maturity since this contribution is not eligible for deduction u/s 80C at the time of contribution.
iii. Payment under a Keyman Insurance Policy: Any payment under a Keyman insurance
policy including bonus thereon shall be taxable.
iv. Lump sum compensation: Any amount due to or received, whether in lump sum or
otherwise, by an assessee from any person:
• Before his joining any employment with that person, or
• After cessation of his employment with that person
As regards lump sum compensation is concerned, the amount need not necessarily be
received from an employer or former employer as the section uses the term “any person”.
Hence if this amount is received from any person other than an employer it would still be
taxable as salary, overriding the fundamental requirement of employer – employee
relationship mandated u/s 15.
Dearness relief received by a retired judge is 'profit in lieu of salary - Justice G.K.
Mathur vs.CIT [2012] 25 taxmann.com 507 (All.)
3.6 Retirement Benefits
3.6.1 Gratuity – Sec 10(10)
Gratuity received by an employee on retirement shall be chargeable as salary income to the extent
it is not exempt under this section. Gratuity received on the death of an employee by his legal
heirs shall not be taxable in the hands of the legal heirs. Exemption for Gratuity received by an
employee shall be classified as:
Employees Amount exempt
Government Employees
and employees of Local
authority – Sec 10(10)(i)
Fully exempt
Other Employees
covered by
Payment of Gratuity Act
1970 – Sec 10(10)(ii)
Exempt to the extent of least of the following :
− Actual Gratuity Received
− 15/26*last drawn salary*No of Years
(7/26*last drawn salary*No of Years - in the case of seasonal
establishment)
− Notified amount of Rs 10,00,000
Note:
No of Years = Completed years of service +
Part of the year in excess of 6 Months
Salary = Basic + D.A (full DA)
Other Employees not
covered by
Payment of Gratuity Act
1970– Sec 10(10)(iii)
Exempt to the extent of least of the following :
− Actual Gratuity Received
− 1/2*10months Avg salary*No of Years
− Notified amount of Rs.10,00,000
Note:
No of Years = Fully Completed years of service
Salary = Basic + D.A (forming part of retirement benefits)
+ Commission as a % of turnover
Average Salary till the month preceding the month of retirement.
For example if an employee retires on 15th of April his average
salary shall be computed for the period of 10 months ending on
31st of March i.e. from June 1st to March 31st.
In the case of employees who retire, become incapacitated, die or whose employment is
terminated on or after 24th May 2010, the specified amount of gratuity exemption shall be
enhanced from Rs 3.5 lacs to Rs 10 lacs – Notification no 43/2010 dated 11.06.2010.
The limits given for non Government employees (both covered by Payment of Gratuity Act and others)
shall now stand enhanced to Rs 10 lacs effective 24.05.2010.
Where an employee receives salary from more than one employer, he can claim
exemption for both the sums received.
Maximum benefit cannot exceed Rs 3.50 lakhs during the life of an assessee, though it
may be claimed at different points of time.
In respect of Gratuity which is not exempt, an employee can claim relief u/s 89.
A lump sum payment made gratuitously or by way of compensation or otherwise to the widow or other
legal heirs of an employee, who dies while still in active service is not taxable – Circular No 573,
dated August 21, 1990.
Ex gratia payment made from the Central Government, State Government, local authority or public sector
under taking to an employee or his legal heirs consequent upon injury to the person/ death of a family
member, while on duty shall not be liable to income tax – Circular No 776 dated 8th June 1999.
Where an employee retires from service before his actual tenure of service, he would still be able to claim
exemption u/s 10(10). It is has been clarified vide CBDT instruction F.No. 194/0/73 – IT dated 19-06-1973
that “termination of employment” would cover an employee who has resigned from the service.
For employees covered by Payment of Gratuity Act 1970:
1. In the case of piece rated employees – 15 days salary would be computed on the basis of average of
total wages excluding over time wages received for a period of 3 months immediately preceding the
termination of his employment.
2. For seasonal establishments – 7 days salary shall be considered instead of 15 days salary ie the
formula shall be: 7/26*last drawn salary*No of Years
Illustration 12
Mr Gaurav is working for BPCL India Ltd for the past 25 years and 11months and 29 days. During
the previous year he decides to hang his boots. He retired from active service on 30th November.
Details of his last drawn salary are as follows:
- Basic Rs 15,000
- DA Rs 15,000
- HRA Rs 10,000
50% of his DA is taken for retirement benefits. Mr Gaurav does not stay in a house owned by
him- he however stays in an ancestral property with his father and brother for which no rent
is recovered from him. He received a sum of Rs 4.50 lacs on retirement. Compute his taxable
income assuming:
• He is a Government employee
• He is an employee covered by Payment of Gratuity Act
• He is an employee not covered by Payment of Gratuity Act
Case A Case B Case C
Basic (15,000*8) 1,20,000 1,20,000 1,20,000 Allowances DA (15,000*8) 1,20,000 1,20,000 1,20,000 HRA (10,000*8) 80,000 80,000 80,000 Retirement Benefits Gratuity 4,50,000 4,50,000 4,50,000 Exemption u/s 10(10) (Working Note 1) 4,50,000 4,50,000 2,81,250 Taxable Gratuity 0 0 1,68,750 Gross Salary 3,20,000 3,20,000 4,88,750
Solution:
Computation of Income under the head Salaries of Mr Gaurav
Note 1: Gratuity received by a Government employee is fully exempt.
Working Note 1
Case A: Government Employee
Actual Gratuity received is fully exempt from taxation
Case B: Covered by Payment of Gratuity Act
Exempted Gratuity will be the least of the following
Actual Gratuity
4,50,000
15/26* last drawn salary*no of years of service (WN 1A) 4,50,000
Notified Amount 10,00,000
Exempted Gratuity 4,50,000
Working Note 1A
15 days salary for no of years Salary: Basic + Full DA
= (15/26*30,000*26) = (Rs 15,000 + Rs 15,000)
= 4,50,000 = Rs 30,000
No of Years : Completed years + Part of a year in excess of 6 months
= 25 years + 1 year = 26 years
Case C: Not Covered by Payment of Gratuity Act
Exempted Gratuity will be the least of the following
Actual Gratuity 4,50,000
½* 10 months average salary*no of years of service (WN 1B) 2,81,250
Notified Amount 10,00,000
Exempted Gratuity
Working Note 1B
2,81,250
Salary: Basic + DA taken for retirement ie 50%
= (Rs 15,000 + Rs 15,000*50%) = Rs 22,500
Half month's salary for number of completed years
= (1/2*22,500*25) = Rs 2,81,250
No of Years : Completed years = 25 years
3.6.2 Pension- Sec 10(10A)
Pension as a retirement benefit can be in two forms, that which is received in lump sum (commuted
pension) and those which are received in periodic installments (uncommuted pension). Provisions
dealing with exemptions pertaining to pension are summarized below:
• Uncommuted Pension (periodic payments): Fully taxable in the case of both Government and
Non Government employees.
• Commuted Pension (Lump sum) is exempt as follows:
Employee Amount Exempt Employees of State and Central
Government, local authority and
statutory corporation – Sec 10(10A)(i)
Fully Exempt
Any other employee – Sec 10(10A)(ii)
If Gratuity is received
with Pension If no Gratuity is received
with Pension 1/3 of Full value of
commuted pension 1/2 of Full value of
commuted pension
– In respect of pension which is not exempt – an employee can claim relief u/s 89.
– Full Value of Pension: Pension received on Commutation
Percentage of Commutation
– Judges of High Cour t and Supreme Cour t will be entitled to the exemption of commuted por tion u/s
10(10A)(i) – Circular No 623 dated 6-1-1992.
– Pension is chargeable to tax on accrual basis irrespective of whether it is voluntary or under a contract.
Arrears of pension are also chargeable on due basis irrespective of whether it is paid or not – T.A.
Ramasubramaniam vs CIT (1975) 100 ITR 408 (Mad).
Illustration 13
Mr Rajiv, an employee of NTC Ltd retired from active employment on 1st of April. On retirement
he received a lump sum pension of Rs 5 lacs for 40% of his total pension and decides to receive
the balance as monthly sums of Rs 20,000. Compute his taxable pension for the year assuming:
• He is a Government employee
• He is a non Government employee and receives gratuity with pension.
• He is a non Government employee and does not receive gratuity with pension.
Solution:
Particulars Case A Case B Case C
Uncommuted Pension (20,000*12) 2,40,000 2,40,000 2,40,000 Commuted Pension 5,00,000 5,00,000 5,00,000
Less Exemption u/s 10(10A)- WN 1 5,00,000 4,16,667 5,00,000
Taxable Commuted pension 0 83,333 0
Total Taxable pension 2,40,000 3,23,333 2,40,000
Working Note 1
Particulars Case A Case B Case C
Situation Government
employee
Pension with
Gratuity
Pension without
Gratuity
Exemption u/s 10(10A) Fully Exempt 1/3 of Full value
of Commuted
pension
1/2 of Full value
of Commuted
pension
Total Exemption 5,00,000 4,16,667 6,25,000
Working Note 1 A
Commuted Pension received 5,00,000
% of commutation 40%
Full value of commuted pension 12,50,000
(Pension received/% of commutation)
3.6.3 Leave Salary – Sec 10(10AA): Leave salary denotes salary paid to an employee for
encashment of unavailed leave eligible as per regular norms of the employer. For example, if an
employee is eligible for 20 days of leave per year as per the norms of the employer and he avails
only 15 days of leave during the year, he may be eligible for encashment of the unavailed leave of
5 days. This encashment is termed as leave salary.
• Encashment of leave during service is fully taxable in the case of all employees. However
relief u/s 89 read with Rule 21(A) shall be available to the employee – Circular No 431
dated 12th September 1985.
• Encashment of accumulated leave at the time of retirement or otherwise– Sec 10(10AA)
shall be exempt as follows:
Employees Amount exempt
Central and State Gov-
ernment Employees Fully exempt u/s 10(10AA)(i)
Any other employee Leave shall be exempt to the extent of least of the following (10(10AA)(ii):
• Actual Leave encashment received
• 10 * Average salary
• Rs 3,00,000 (Amount specified by Government)
• Cash equivalent to unavailed leave subject to a maximum of 30 days
leave per completed year of service. This shall be computed on the
basis of average salary.
Note: Salary = Basic + D.A (forming part of salary for
retirement benefits) + Commission as a % of turnover
Average salary from the date of retirement till 10 months preceding
that date.
Average salary = Salary for the period of 10 months immediately
preceding the retirement date
10
• The provisions of Sec 10(10AA) shall be attracted at the time of “retirement or
otherwise”. The term “otherwise” covers the case of retirement which takes place not at
the time of superannuation but any other time like resignation, voluntary retirement etc. –
CIT vs R.J.Shahney (1986) 159 ITR 160(MAD).
• Leave salary received by the family of a government servant, who died in service, is not taxable in the
hands of the recipient – Circular No 309 dated 3-7-1981.
• Dearness allowance shall be considered as par t of salary only when it is taken for calculation of all
retirement benefits. Where DA is considered for only few of the retirement benefits, it shall not be taken
for the purposes of computing exemption – ITO vs Sr Accounts Officer, Pay & Accounts, DHBVNL
(2009) 33 SOT 37 (Del).
• Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of
such employee at the time of his/her death is an ex gratia payment on compassionate grounds in the nature
of gifts. Thus the payment is not in the nature of salary – Letter No 35/165 dated 5-11-1965.
• Where an employee receives salary from more than one employer, he can claim exemption for both
the sums received.
• The assessee can claim relief u/s 89 in respect of leave encashment.
• Maximum benefit cannot exceed Rs 3.00 lakhs during the life of an assessee, though it may
be claimed at different points of time.
Computation of “Cash equivalent to unavailed leave”:
i. Determine the total number of completed years (ignore
fraction)
ii. Compute Step i* 30 days
iii. Compute unavailed leave = Step ii (-) leave taken during service
iv. Determine unavailed leave as per employer norms (shall be given in the question)
v. Determine eligible unavailed leave to be the lower of step iii or step iv
vi. Compute cash equivalent to unavailed leave = step v*average salary / 30
The total leave eligibility per year cannot exceed 30 days per completed year of service. Sometimes in the
exam you may be given total leave taken for the whole tenor and unavailed leave. In such cases follow the
method adopted in illustration 14 below.
Illustration 14
Mr Jones, retired from active service after having worked for 23 years and 11 months in Hindalco.
Upon retirement, along with other benefits he received a leave encashment of Rs 4 lacs for his
unavailed leave of 400 days. He has availed a total of 240 days of leave during his tenor. His
last drawn basic was Rs 10,000 and DA (fully taken for retirement) was Rs 5,000. Compute the
taxable leave salary assuming:
• He is a Government employee
• Non Government employee
• He is a Non Government employee and his unavailed leave is 500 days
Solution:
Case A: Government employee
Leave salary is fully exempt for Government employees
Case B: Non Government employee
Leave Salary Received 4,00,000
Less Exemption u/s 10(10AA) WN 1 1,50,000
Taxable Leave Salary 2,50,000
Working Note 1 Computation of Exempted leave salary
Least of the following will be exempt as follows:
Actual Leave Salary 4,00,000
10 months salary - WN 1A 1,50,000
Notified amount 3,00,000
Cash equivalent to unavailed leave subject to a maximum of 2,00,000
30 days for every completed year of service - WN 1B Exempted Leave Salary (least of the above)
1,50,000
Working Note 1 A
10 months salary (Rs 15,000*10) 1,50,000
Working Note 1 B
Number of completed years of service 23
Maximum leave for every completed year 30
Total eligible leave 690
Less Leave Taken during service 240
Maximum permissible unavailed leave 450
Unavailed leave as per employer norms 400
Unavailed leave considered for exemption purposes 400
(lower of the two above) Number of months (unavailed leave/30) 13.3
Unavailed leave salary @ Rs 15,000 p.m 2,00,000
Case C: Non Government employee - 500 days unavailed leave
Leave Salary Received 4,00,000 Less Exemption u/s 10(10AA) WN 2 1,50,000
Taxable Leave Salary 2,50,000
Working Note 2 : Exempted leave salary Least of the following will be exempt as follows:
Actual Leave Salary 4,00,000
10 months salary - WN 2A 1,50,000
Notified amount 3,00,000
Cash equivalent to unavailed leave subject to a maximum of 2,25,000
30 days for every completed year of service - WN 2B Exempted Leave Salary (least of the above) 1,50,000
Working Note 2 A
10 months salary (Rs 15,000*10)
1,50,000
Working Note 2 B
Number of completed years of service 23 Maximum credit for every completed year 30
Total eligible leave 690 Less Leave Taken during service 240
Maximum permissible unavailed leave 450
Unavailed leave as per employer norms 500
Unavailed leave considered for exemption purposes
(lower of the two above)
Number of months unavailed leave
450
15.0
Unavailed leave salary @ Rs 15,000 p.m 2,25,000
The number of 30 days credit for every completed year of service is only the maximum amount
available. If the norms of the employer provide for lesser number of days, such number will be
considered for the purpose of exemption.
Incase the question has given unavailed leave days and leave taken, compare the same with the unavailed leave
@ 30 days for every completed year and consider the lower of the two numbers for exemption purposes.
3.6.4 Retrenchment Compensation- Sec 10(10B)
Any compensation received by a workman at the time of his retrenchment under:
• Industrial Disputes Act
• Any other Act or rules issued there under
• Any standing order
• Any award, contract of service or otherwise
Shall be exempt to the extent of least of the following:
• Actual amount received
• Any amount calculated in accordance with the provisions of Industrial Disputes Act (15
days average pay for every completed year of service)
• Rs 5 lacs (amount specified by Central Govt).
- The aforesaid limits are not applicable in cases where compensation is paid under any
scheme approved by the Government.
- Compensation paid in excess of the above limits shall be eligible for relief u/s 89.
- Average pay for the purpose of this section shall mean the average of wages payable to a workman:
Type of workman Average pay of
In case of monthly paid workman Three complete calendar months preceding the date on which
average pay is payable
In case of weekly paid workman Four complete weeks preceding the date on which average pay
is payable In case of daily paid workman Twelve full working days preceding the date on which average
pay is payable
3.6.5 Compensation received on Voluntary Retirement Scheme(VRS)- Sec 10(10C)
Compensation received at the time of voluntary retirement is exempt subject to the following
conditions:
• Compensation is received or receivable at the time of retirement
• Compensation is received by employees of the following undertakings:
ƒ Authority formed by Central, State or Provincial Act
ƒ Local authority
ƒ University / IIT
ƒ State / Central Government
ƒ Notified institute having importance throughout India or any state.
ƒ Notified institute of Management (IIMs and IIFT)
ƒ Public Sector company
ƒ Any company or co operative society
• Compensation received in a scheme of voluntary retirement framed in accordance with the
prescribed guidelines – Rule 2BA
• Maximum exemption is Rs 5 lacs
• Where benefit u/s 10(10C) is claimed for any assessment year, no further benefit under this
section shall be allowed for any other assessment years.
Guidelines- Rule 2BA:
• Employee has completed 40 years of age or 10 years of service
• VRS applies to all employees of the company or cooperative society excluding the Directors
• The scheme should result in overall reduction in the existing strength of the employees
• Vacancy caused on retirement should not be filled up
• Retiring employees shall not be re employed in any other company belonging to the same
management
• Amount receivable on voluntary retirement of the employee does not exceed:
ƒ 3 months salary for each completed year of service, OR
ƒ Salary at the time of retirement multiplied by balance months of service till
actual retirement.
ƒ Salary = Basic + DA (forming part of salary for retirement benefits) + Commission
(as % of turnover)
Where an assessee has obtained relief u/s 89(1) on VRS compensation for any assessment
year, no exemption shall be available to the assessee under this section.
Can an employee of a State Government claim exemption under section 10(10C) in respect
of compensation received on voluntary retirement to the extent of Rs. 5 lakh and relief under
section 89 in respect of the amount of compensation in excess of Rs. 5 lakh?
According to the rationale given in CIT v. G.V. Venugopal [2005] 144 Taxman 784 (Mad.)
- An employee can claim both exemption and relief in respect of voluntary retirement compensation
VRS compensation is exempt under section 10(10C) up to Rs. 5 lakhs and on the excess, relief under
section
89 could be claimed. It was also held in the case of ITO v Dilip Shirodkar [2004] 2 SOT 947 (Panaji)
that Relief under section 89 cannot be denied only because an exemption has been allowed under section
10(10C).
Where any relief has been allowed to an assessee u/s 89 for any assessment year in respect of
any amount received or receivable on his voluntary retirement or termination of service or voluntary
separation, no exemption under this clause shall be allowed to him in relation to such, or any other,
assessment year.
Illustration 15
Mr Tarun, working with Sony India, decided to take voluntary retirement after having served the
company sincerely for 24 years. At the time of retirement he was drawing a monthly basic of Rs
15,000 and DA (fully considered for retirement) of Rs 5,000. He was eligible for a commission of
1% on the turnover achieved by him. His average monthly achievement was Rs 1 lac. He received
a lump sum consideration of Rs 7 lacs on accepting his retirement when he had 20 months of
balance service left. He wants to know the tax implications of this transaction.
Solution:
Computation of Income under the head Salaries of Mr Tarun
Total Compensation received on voluntary retirement 7,00,000
Less Exemption u/s 10(10C) (WN1) 4,20,000
Taxable Compensation 2,80,000
Working Note 1- Computation of exemption u/s 10(10C)
Lower of:
3 months salary for every completed year of service 15,12,000
Salary on retirement for balance service tenor 4,20,000
Maximum Exemption - Notified Amount 5,00,000
Total exemption u/s 10(10C) 4,20,000
Salary for 10(10C) = Basic + DA (retirement)+ Commission on % of sales
= 15,000+5000+1% of Rs 1 lac
= 21,000
Note: Assumed that all the guidelines mentioned in this regard have been complied with.
3.6.6 Contribution to Provident Fund - Sec 10(11) There are different types of provident funds. Contributions to these funds are made by the
employee and employer. Tax implications on contributions as well as the interest earned on
balances vary based on the nature of the fund and other circumstances. Given below is a summary
of tax implications of various provident funds under different circumstances:
Particulars Statutory Provi-
dent Fund Recognised
Provident Fund Unrecognized
Provident Fund Public Provi-
dent Fund
Employee‟s
contribution Eligible for de-
duction u/s 80C Eligible for deduction
u/s 80C Sec 80C is not
applicable Eligible for de-
duction u/s 80C Employer‟s
contribution Fully exempt Exempt up to 12%
salary (salary = basic +
DA taken for retirement
+ commission as a
percentage of turnover)
Not exempt but not
taxed every year Not applicable
Interest Fully exempt Exempt upto
9.5% per annum from
1st September 2010
vide Notification no
24/2011 dated 13/5/11
Not exempt but also
not taxable every
year
Fully exempt
Repayment
of Lump
sum on
retirement or
maturity or
withdrawal
Fully exempt –
Sec 10(11) Fully exempt u/s
10 (12) subject to
conditions prescribed
– given below - Note
(A)
Employer‟s
contribution and
interest are taxable as
Profits in lieu of salary.
Interest on Employees
contribution is
chargeable as Income
from Other Sources
Fully exempt
Note: (A): Conditions for exemption of lump sum received from Recognised Provident
Fund: The employee should have rendered five years of continuous service. Exception
shall be given to withdrawal in the following circumstances:
- Ill health
- Discontinuance of employers business
- Uncontrollable causes
- Transfer of balance between one employer and another.
Discuss the taxability of the balance amount withdrawn by an employee from the
recognized provident fund at the time of leaving the service?
Pls refer to 3.6.6.
Central Government has notified that with effect from 01.12.2011, subscriptions made and balances
at the credit of the subscriber of a Public Provident Fund, shall earn an interest of 8.6 % per annum.
3.7 Deductions – Sec 16
Deductions under salary income are given u/s 16. Deductions can be classified as under:
• Entertainment Allowance – Sec 16(ii) : Explained under allowances
• Professional tax – Sec 16(iii) : Explained below
Professional tax – Sec 16(iii)
• Professional Tax paid is allowed as a deduction in the hands of all employees.
• Where employer pays professional tax on behalf of the employee, the same will be added to
gross salary and then shown as a deduction u/s 16(iii).
Illustration 16
Computed gross salary income (excluding professional tax) of Mr Rahul is Rs 5 lacs. During the
year he paid a professional tax of Rs 5,000. Compute his net salary income assuming:
- Professional tax paid from his salary income
- Professional tax paid was reimbursed by his employer.
Solution:
Case 1: Professional Tax borne by the employee
Computation of income under the head Salaries of Mr Rahul
Gross Salary 5,00,000
Less Deduction u/s 16 (iii) professional tax paid 5,000
Taxable salary
Case 2: Professional Tax borne by the employer
Computation of Income under the head Salaries of Mr Rahul
4,95,000
Gross Salary excluding Professional tax received 5,00,000
Add Professional tax reimbursement 5,000
Gross Salary 5,05,000
Less Deduction u/s 16 (iii) professional tax paid 5,000
Taxable Salary 5,00,000
Ms. X working as Regional Area Sales Manager of P Marketing Ltd. was paid salary
and commission based as a percentage on the volume of sales effected by her. Ms.
X claimed the expenses incurred by her for earning the commission in the return of
income, which were disallowed by the Assessing Officer.
Solution: Commission is taxable in the hands of Ms. X under the head “Salaries”. It is therefore not
possible for the assessee to claim expenditure incurred for earning salary income. While, interpreting
the expression „profits in lieu of salary‟ the Gujarat High Court in the case of Chimanbhai H Patel
v. CIT [1998] 99 TAXMAN 63 (Guj.) has held that expenditure incurred for earning such extra
income is eligible for deduction. However, the Bombay High Court in the case of CIT v. Gopal
Krishna Suri [2000] 113 TAXMAN 707 (Mum.) has given a contradictory verdict. Also deduction
against salary income is provided u/s 16 and according to Sec 16, no deduction other that professional
tax entertainment allowance is allowed.
3.8 Relief u/s 89 read with Rule 21A
Relief is allowed to an assessee if any portion of salary is received in arrears or advance owing
to the fact that sums pertaining to earlier years or subsequent years would be chargeable to tax
in the year of receipt. We must appreciate the fact that Rs 5 lacs p.a received over three years
would attract a much lower tax liability instead of Rs 15 lacs received in one year. To offset this
anomaly in taxation we have relief provisions u/s 89. Therefore, relief has been made available to
the following transactions:
Rule Nature of receipt
21A(2) Arrears or advance salary received
21A(3) Gratuity
21A(4) Termination compensation
21A(5) Commuted pension
21A(6) Other payment
3.8.1 Relief for arrears or advance salary received – Rule 21A(2)
Relief for arrears or advance salary is computed in the following manner:
i. Compute tax payable on total income including arrears or advance salary received
ii. Compute tax payable on total income excluding arrears or advance salary received
iii. Compute additional tax = Step i (-) Step ii
iv. Compute tax payable on total income including arrears or advance salary received for the
previous year to which such salary pertains
v. Compute tax payable on total income excluding arrears or advance salary received for the
previous year to which such salary pertains
vi. Compute incremental tax = Step iv (-) Step v
vii. Relief u/s 89 = Step iii (-) Step vi.
Where additional tax payable is lower than incremental tax, no relief u/s 89(1) shall be available
to the assessee.
For the purpose of relief calculation, tax on “total income” of the assessee shall have to be considered.
For the purpose of relief calculations, tax liability prior to surcharge and cess shall be considered. However
Chapter VIA deductions shall be fully considered.
Illustration 17
Mr Prabhu is an employee of KSBC Bank India. During the previous year he received a sum of Rs
2 lacs as arrears of salary of the immediately preceding previous year. Total income of Mr Prabhu
for the respective years is as follows:
- Current financial year : Rs 8 lacs
- Preceding financial year : Rs 3 lacs
Computation of tax payable by Mr Prabhu for the year ending 31st March 2013
Salary income (8,00,000+2,00,000) 10,00,000
Gross total income 10,00,000
Tax liability 1,30,000
Less Relief u/s 89(1) WN 1 20,000
Net tax payable 1,10,000
Add Cess @ 3% 3,300
Total tax liability 1,13,300
Working note 1: Computation of relief u/s 89(1)
1 Tax payable on total income including arrears salary received 1,30,000
2 Tax payable on total income excluding arrears salary received 90,000
3 Additional tax 40,000
4 Tax payable on total income including arrears salary received for the
immediately preceding year 32,000
5 Tax payable on total income excluding arrears salary received for the
immediately preceding year 12,000
6 Incremental tax 20,000
7 Relief u/s 89(1) Step 3- Step 6 20,000
3.8.2 Relief in respect of gratuity – Rule 21A(3)
Relief u/s 89 is available for gratuity received in excess of amounts exempt u/s 10(10). Relief on
gratuity is computed in the following manner
Where period of service is 15 years or
more Where period of service is 5 years or
more but less than 15 years i. Compute average rate of tax including
gratuity for the year of receipt
ii. Compute tax on gratuity at average rate
of tax computed in (i) above
iii. Compute average of average rate of tax
for three preceding previous years by
adding 1/3rd gratuity to each such year
iv. Compute tax on gratuity at average rate
of tax computed in (iii) above
v. Relief u/s 89 = Step ii (-) Step iv
i. Compute average rate of tax including
gratuity for the year of receipt
ii. Compute tax on gratuity at average rate
of tax computed in (i) above
iii. Compute average of average rate of tax
for two preceding previous years by
adding 1/2 gratuity to each such year
iv. Compute tax on gratuity at average rate
of tax computed in (iii) above
v. Relief u/s 89 = Step ii (-) Step iv
No relief is available if the period of service is less than 5 years
Illustration 18
Compute Relief in respect of gratuity under the following two circumstances:
- Taxable income (excluding gratuity) after availing deductions under chapter VIA is Rs. 10
Lakhs
- Taxable gratuity after availing exemption u/s 10(10) is Rs. 4 lakhs
Case 1:
The employee has been in service for a period of 25 years. Income for three preceding previous
years is as follows:
Previous year Total Income
2012-13 800000
2011-12 700000
2010-11 500000
Case 2:
The employee has been in service for a period of 9 years. Income for two preceding previous
years is as follows:
Previous year Total Income
2012-13 800000
2011-12 700000
Solution:
Case 1: Where period of service is 15 years or more
Step 1: Computation of average rate of tax including gratuity for the year of receipt.
Total income (including taxable gratuity) = Rs.14,00,000
Tax liability (including cess) = Rs. 2,57,500
Average rate of tax = Rs. 2,57,500
Rs.14,00,000
= 18.39%
Step 2: Computation of tax on gratuity at average rate of tax computed in Step 1 above
Tax on gratuity at average rate of tax = Rs.4,00,000 x 18.39%
= Rs. 73,571
Step 3: Computation of Average rate of tax for three preceding previous year by adding 1/3rd
gratuity to each such year
Previous year
Assessment year
2012-13
2013-14
2011-12
2012-13
2010-11
2011-12
Total Income
Gratuity
8,00,000
1,33,333
7,00,000
1,33,333
5,00,000
1,33,334
Total Income including
Gratuity
Tax on total income (incl.
gratuity)
Average rate of tax
9,33,333
1,35,960
14.57%
8,33,333
1,07,120
12.85%
6,33,334
96,820
15.29%
Average of Average rate of tax 14.24%
Step 4: Computation of tax on gratuity at average rate of tax computed in step 3 above
Tax on gratuity at average rate of tax computed in step 3 = Rs.4,00,000 x 14.24%
= Rs. 56,960
Step 5: Relief u/s 89 = Step 2 – Step 4
= Rs.73,571 – Rs.56,960
= Rs. 16,611
Case 2: Where period of service is 5 years or more but less than 15 years
Step 1 and Step 2 are the same.
Step 3:
Previous year 2011-12 2010-11
Assessment year
Total Income
Gratuity
Total Income
Tax on total income (incl. gratuity)
Average rate of tax
2012-13
800000
200000
1000000
156560
15.66%
2011-12
700000
200000
900000
127720
14.91%
Average of Average rate of tax 14.93%
Step 4: Computation of tax on gratuity at average rate of tax computed in step 3 above
Tax on gratuity at average rate of tax computed in step 3 = Rs.4,00,000 x 14.93%
= Rs. 59,720
Step 5: Relief u/s 89 = Step 2 – Step 4
= Rs. 73,571 - Rs. 59,720
= Rs. 13,851
3.8.3 Relief in respect of compensation on termination – Rule 21A(4)
Applicability of relief
- Where compensation is received by an employee from his employer or former employer
- in connection with termination of employment
- after rendering continuous service for not less than 3 years and
- where the unexpired term of employment is also not less than 3 years
- relief u/s 89 shall be computed in the manner prescribed.
Computation of relief:
i. Compute average rate of tax including terminal compensation for the year of receipt
ii. Compute tax on terminal compensation at average rate of tax computed in (i) above
iii. Compute average rate of tax for three preceding previous years by adding 1/3rd terminal
compensation to each such year
iv. Compute tax on terminal compensation at average rate of tax computed in (iii) above
v. Relief u/s 89 = Step ii (-) Step iv
3.8.4 Relief in respect of commuted pension – Rule 21A(5)
Relief u/s 89 is available for commuted pension received in excess of amounts exempt u/s 10(10A).
Relief is computed in the following manner
i. Compute average rate of tax including commuted pension for the year of receipt
ii. Compute tax on commuted pension at average rate of tax computed in (i) above
iii. Compute average rate of tax for three preceding previous years by adding 1/3rd commuted
pension to each such year
iv. Compute tax on commuted pension at average rate of tax computed in (iii) above
v. Relief u/s 89 = Step ii (-) Step iv
3.8.5 Relief in respect of other payments – Rule 21A(6)
Relief in respect of cases other than those covered by Rule 21(A)(2) to (5), the Board may, having
regard to the circumstances of the case, allow such relief as it deems fit.
X, an employee with Y Ltd. provides the following information relating to his income
for financial year 2012-13:
1. He received salary of Rs.25,000 per month including transpor t allowance @
Rs.2,500 per month for official purposes.
2. He deposited Rs.2,500 per month in his account under pension scheme notified by the Central
Government.
3. He paid a sum of Rs.60,000 during the year as interest on loan taken in April 2012 from
bank for higher studies of his daughter.
4. He paid health insurance premium for himself and his family members Rs.8,500 in cash and
Rs.9,000 by credit card.
5. He invested Rs.40,000 in notified bonds under section 80C issued by NABARD in July 2012.
6. Equity Shares having fair market price of Rs.1,00,000 were allotted to him by the company
at a concessional price Rs.20,000 on May 30,2012, which were sold by him for Rs.1,80,000
on February 28,2013.
Compute the total income of X for assessment year 2013-14 and give reasons for treatment to
each of the items.
Solution:
Computation of gross total income of Mr X for the year ending 31st of March 2013
Basic salary (25,000-2,500)*12
Transpor t allowance (2500 *12)
30,000
2,70,000
Less Exemption (800*12) 9,600 20,400
Taxable perquisite - ESOP
(1,00,000-20,000)
Total salary income
80,000
3,70,400
Working Note 2: Computation of Income under the capital gains
Sale consideration 1,80,000
Less Cost of acquisition u/s 49(2AA) 1,00,000
Shor t term capital gains 80,000
Income from Salaries
WN 1
3,70,400
Shor t term capital gains WN 2 80,000
Gross total income 4,50,400 Less Chapter VI A deduction
- Deduction u/s 80C 40,000
- Deduction u/s 80CCD 30,000
- Deduction u/s 80D 9,000
- Deduction u/s 80E 60,000 1,39,000
Net taxable income 3,11,400
Note Assumed that fair market value of the share given is the fair market value on exercise date
Assumed that the employer does not contribute to a notified pension scheme
Mediclaim premium paid by cash is not eligible for deduction u/s 80D
Working Note 1: Computation of Income under the head salaries
