INCOME TAX

COURSE
BY CA POOJA GUPTA

DAY-2 & 3
INCOME FROM SALARY
 Important Points

Salary
Sec.15
Sec.16
Charging Section Sec.17
(Basis of Charge) Deductions

 Due or Paid  Sec.16(ia):Standard Deduction  Sec.17(1): Meaning of Salary

whichever is  Sec.16(ii): Entertainment Allowance  Sec.17(2): Perquisites
earlier  Sec.16(iii): Professional Tax  Sec.17(3): Profit in lieu of Salary
 Section 15: Charging Section

The following income shall be chargeable to income-tax under the head "Salaries"—

(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though
not due or before it became due to him;

(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former
employer, if not charged to income-tax for any earlier previous year.
 Explanation 1.—For the removal of doubts, it is hereby declared that where any salary paid in advance is included in
the total income of any person for any previous year it shall not be included again in the total income of the person
when the salary becomes due.
 Explanation 2.—Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a
partner of a firm from the firm shall not be regarded as "salary" for the purposes of this section.
 Section 15: Charging Section

 Income is taxable under the head salary if there is Employer-Employee relationship.

 Salary is taxable on the basis of due or received whichever is earlier.
 Salary received by the partner from partnership firm shall be taxable under the head
PGBP.
 Salary received by MP ,MLA,MLC from Govt. shall be taxable under the head IFOS.
 Any amount received before joining employment or after cessation of employment is
treated as “Profit in lieu” of salary & it is taxable.
 Place of accrual: Salary will be taxable where services are rendered
(Exception if Govt. employee of citizen of India who is posting abroad his basic salary will
taxable in India)
 Meaning of Salary (Sec.17(1))

For the purpose of Section 15 and 16 and of this section, Salary Includes:
 Wages
 Pension
 Gratuity
 Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages
 Advance of Salary
 Leave Encashment
 Annual accretion to the balance of Recognized Provident Fund
 Transferred balance in Recognized Provident Fund
 Contribution by CG or any other employer to Employees Pension Account as referred in Sec.
80CCD
 Taxability of Various Components of Salary

Basic Salary • Fully Taxable

Dearness Allowance • Fully Taxable
Commission • Fully Taxable
Bonus • Fully Taxable, On Receipt Basis.
Advance Salary • On Receipt Basis
Arrears Salary • Taxable in the Year of Receipt
Allowance • As per Valuation
Perquisite • As per Valuation
 Section 10

Allowances

Specified/Notified House Rent

Fully Exempt Fully Taxable
Allowance Allowance

 Partly Exempt  Conditionally

Exempt
 Specified/official Allowances – Sec.10(14)(i)
 Travelling Allowance
(for official tours) Section 10(14)(i) provide exemption
towards prescribed special allowances
Daily Allowance granted to the employees, to meet
(for boarding and loading of official tours)
expenses (wholly, exclusively, and
Conveyance Allowance necessarily) towards the performance of the
(for expenditure incurred on conveyance) official duty. The exemption is available only
Uniform Allowance and only if the expenses are actually
(for purchase or maint. of uniform) incurred by the employees.
Exempt = Actually paid
Helper Allowance or Actually Spent
whichever is less
Academic/Research Allowance
SECTION 115BAC: An employee who opts for the provisions of section 115BAC would be entitled for exemption
only for first three allowances above.
During PY 2020-21, the following allowances are given to X by the employer company
Amount of Amount Actually Amount
Nature of allowance Allowance spent taxable
Travelling allowance for official purposes 36,000 32,000 4,000

Transfer allowance given on transfer of X 40,000 41,000 Nil

Conveyance allowance for official purposes 50,000 42,000 8,000

Helper allowance of helper for official purposes 68,000 64,000 4,000

Research allowance 1,00,000 90,000 10,000

Uniform allowance for official purposes 18,000 17,000 1,000

 Exempt = Actually paid or
Notified/Personal Allowances- Sec.10(14) (ii) Limit specified whichever
to meet personal expenses or to compensate increased cost of living is less
(Actual amount spent is
No. Allowances Exempted u/s 10(14) (ii) of no relevance)

1 Transport allowance Max 3200 p.m (in case of blind, deaf & dumb or
(office ↔home & vice versa) handicapped) otherwise fully taxable
2 Children Education Allowance Max 100 p.m per child (max 2 child)
3 Children Hostel Allowance Max 300 p.m per child (max 2 child)
4 Underground Allowance (Mines) Max. 800 p.m.
5 Tribal area Allowance Max. 200 p.m.
6 Allowances to employee of Transport 70% of allowance
Sector (Running/outstation Allowance) or 10000 p.m. whichever is lower
means for Transport Employees
(Example: Air Hostess)
7. Hilly Area Allowance Rs.300 to 800 p.m. [7,000 p.m in Siachen of J&K]
 Section - 10 (14) (ii)

Section 10 (14) (ii) Rule 2BB(2): The other tax exemptions under Section 10 (14) (ii) are as follows:
Compensatory/Climate Allowance/Hilly Area allowance-
When working in places that have a high altitude, the employees may receive a Climate Allowance, which is
• Hilly areas of HP, J&K and the North East- INR 800.
• Siachen- INR 7,000/ month
• 300 per month for all the places located at the height of 1,000 meters or more above the sea levels.
 Section - 10 (14) (ii)

Border area allowance / difficult or disturbed area allowance / remote locality

allowance-
• INR 1,300 per month for the prescribed areas.
• INR 1,100 per month for installations in the Continental Shelf and Exclusive Economic Zone of India.
• INR 1,050 per month for the prescribed areas.
• INR 750 per month for the prescribed areas.
• INR 300 per month for the jog falls in Shimoga (Karnataka).
• INR 200 per month for the State of Himachal Pradesh, Assam, and Meghalaya.
 Section - 10 (14) (ii)

Modified Field Area Allowance

INR 1000 per month for the prescribed area of Punjab, Rajasthan, Haryana, Himachal Pradesh, Arunachal
Pradesh, Assam, Sikkim, West Bengal, Uttar Pradesh, Jammu and Kashmir, and throughout Mizoram and
Tripura.

Field Area Allowance

When working in J&K, Manipur, AP, Nagaland, UP, Sikkim or Manipur, the individual gets an allowance of INR
2600 per month.

Note: Employee cannot claim Border Area Allowance if these exemption is taken
 Section - 10 (14) (ii)

Allowance for Duty in Counter Insurgency

An allowance of INR 3900 is received every month to the personnel who are serving in counter-insurgency areas.
Members of armed forces operating in areas away from their permanent locations.
High Altitude Allowance
The High Altitude Allowance is granted to the armed forces personnel who are serving in high altitude areas:
An altitude between 9,000 feet to 15,000 feet-INR 1060 per month An altitude above 15,000 feet-INR 1600 per month
Island Duty Allowance
An Island Duty Allowance is granted to the armed forces personnel who are serving in Andaman and Nicobar and
Lakshadweep Islands, it amounts to INR 3,250 monthly.

SECTION 115BAC: An employee who opts for the provisions of section 115BAC would be entitled for exemption
only for transport allowance granted to handicapped employee of Rs.3,200.
 Fully Exempt

Allowances given to HC/SC judges

Allowances paid by the UNO to its employees - Sec. 10(6)

Allowances or perquisites to Govt. employee who is citizen of

India and Posting abroad – Sec. 10(7)
Fully Exempt
(Note: only allowances/Preq. are exempt)
 Fully Taxable
Section 10(14)

Project Overtime
Allowance Allowance

Servant Telephone
Allowance Allowance

Tiffin, Lunch, Holiday

Dinner or
Refreshment Allowance

City Any Other

Compensatory Taxable Cash
Allowance Allowance Allowance
 House Rent Allowance (HRA) – Sec.10 (13A)

If Employee
 Not paying any  Paying Rent
Rent or staying
in his own house
 Least of Following is Exempt:
 No Exemption  Actual Amount of HRA
Available
 Rent Paid Less 10% of Salary

 HRA fully  50% of Salary (Delhi, Mumbai, Kolkata,

Taxable Chennai) & 40% of Salary (for other
cities)
Salary= Basic Salary+ DA (In terms) +
commission (if Turnover based)

Note: It is mandatory for employee to report PAN of the landlord to the employer if rent paid is more
than Rs.1,00,000 [Circular No. 08/2013 dated10-10-2013].
 House Rent Allowance
Example
Salary of Ram Amount (Yearly)
Basic Salary 2,00,000
DA (as per terms of employment) 1,00,000
Bonus 50,000
House rent allowance (HRA) 24,000 (2,000 P.M.)
Rent paid during the year 36,000 (3,000 P.M.)

Basic salary 2,00,000 Particular Amount

Dearness allowance 1,00,000 Actual HRA received 24,000
Total 3,00,000 Rent paid Less 10% of salary 36,000 – 30,000
10% of salary 30,000 = 6,000
40% of salary 1,20,000 40% of salary 1,20,000
SECTION 115BAC: An employee who opts Available exemption (least of the above) 6,000
for the provisions of section 115BAC would
not be entitled for HRA Taxable HRA (24000-6000) 18,000
Allowances in ITR
 Deductions from Salary – Sec.16
Standard Deduction 16(ia)

• Standard deduction of Rs.50000

• or the amount of salary,
whichever is lower.
(amended by FA 2019)

SECTION 115BAC: An employee who opts for the provisions of section 115BAC would not be entitled for standard
deduction
 Entertainment Allowance 16(ii)
This deduction is specifically allowed to govt. employees only as follows:
 Actual amount received
 20% of Basic (only) Salary
 Rs.5000
(Whichever is Lower)

It is fully taxable for all other employees.

 Professional Tax - 16(iii)
 As per Article 276 of Indian constitution, state government is empowered to levy tax
on profession, business or employment and such tax shall be called professional tax or
employment tax.
 If it is paid by employer on behalf of employee, then first it should be taxable and
there after deduction allowed u/s 16.
 If it is paid by employee than only deduction is allowed.
Paid by Employer Employee
Add while calculating Gross Salary (Taxable) -
Then Deduction u/s 16 Deduction u/s 16
 Allowed only if and when tax actually deducted
 Perquisites Sec17(2)
 It means extra benefit offered by employer to employee.
 It may be in cash on kind (monetary or non monetary)
Allowance vs. Perquisites
Allowance Perquisites
• Means Monthly Fixed Amount Received by • Means Benefits or Facility Provided by
Employee from Employer Employer to Employee
• Whether Actual Expenditure is Incurred or • It is Received when actual expenditure
not. incurred
• e.g. HRA, Medical Allowance • e.g. Medical Facility, Car Facility

Reimbursement of Expenses incurred in official discharge of duties → Not a Perquisite.

 Perquisites
 Rent Free Accommodation  Lunch Facility
 Leave Travel Concession  Car Facility
 Medical Facility  Transport Facility for Transport
Employee
 Loan
 Education Facility
 Gift
 GAS, Electricity & Water
 ESOP Supply
 Use of Moveable Asset  Free Servant
 Transfer of Moveable Assets  Any other Perquisite
 Rent Free Accommodation
(Unfurnished)

Other than Govt.

Govt. Employees Employees

Taxable Value: If Accommodation

If Hired by
License fee owned by
determined by employer Employer
CG or SG

IF Population of City is up to Population a) 15% of Salary

Population above
10 Lacs Between 10 to 25 Lacs b) Rent paid by
25lacs Employer
Taxable Value: Taxable Value:
7.5% of Salary 15% of Salary. Whichever is lower
Taxable Value:
10% of Salary
 Meaning of Salary for Rent free
accommodation
Incudes:
 Basic Salary
 D.A. (in terms)
 Any Commission, Bonus , fee
 Taxable part of all Allowances
 Any other monetary benefit from one or more employer
Doesn’t Include:
 Taxable portion of PF
 Taxable portion of Perquisites u/s 17(2)
 Benefits received at the time of retirement like gratuity, pension etc.
 Arrear of salary or advance salary
 Rent Free Accommodation
(Furnished)

Value of Rent Free Accommodation Amount

Rent Free accommodation (unfurnished)
xxx
Add: 10% of Original Cost of Furniture (If Owned by Employer) xxx

If Hired by Employer (Actual charges paid by Employer) xxx

Rent Free accommodation (furnished) xxx

Rent-free official residence provided to a Judge of HC/SC & Officer of Parliament → Not taxable.
Ram informs you the particulars of salary for previous year ending 31.03.2021:
Basic pay: Rs.36,000; DA: Rs.4,800 (not forming part of salary); Bonus: Rs.6,000; Commission: Rs.4,000; City
Compensatory Allowance: Rs.3,600.

Calculate the value of perquisite in respect of rent-free furnished house if Ram stays in a city with a population
(a) more than 25 Lacs,
(b) less than 10 Lacs,
(c) between 10 Lacs & 25 Lacs. Cost of furniture provided is Rs.16,000. Sofa was taken on rent for Rs.300 p.m.

Value of Rent-free unfurnished Accomodation

(a) Population > 25 Lacs → 15% of salary = 15% of Rs. 49,600 = Rs. 7,440
(b) Population 10 lac – 25 lacs → 10% of salary = 10% of Rs. 49,600 = Rs. 4960
(c) Population < 10 lacs → 7.5% of salary = 7.5% of Rs. 49,600 = Rs. 3,720
Value of Furnished Accommodation
Particulars Population > 25L 10 Lacs – 25 Lacs Population < 10L
Value of unfurnished accommodation 7,440 4,960 3,720
Add: Perquisites for value of furniture 5,200 5,200 5,200
[(10% of Rs. 16,000) + (300 x 12)]

Value of furnished accommodation 12,640 10,160 8,920

 Accommodation in Remote Area
Fully Exempt
Accommodation in Hotel
If stay is not more than 15 • Exempt
days

If stay is more than 15 • 24% of Salary or

days • Actual Charges Paid for Hotel, whichever is lower
 Concessional Accommodation

Value of Concessional Accommodation Amount

Rent Free accommodation (unfurnished)
xxx
Add: 10% of Cost of Furniture (If Owned by Employer) xxx
If Hired by Employer (Actual charges paid by Employer) xxx
Rent Free Unfurnished Accommodation xxx
Less: Rent Recovered from Employee xxx
Value of concessional Accommodation xxx
 Perquisites in case of specified
employees – Sec.17(2)
Specified employees means any employee who has complied with atleast one of the following conditions
given below:
1) Any employee who is a director in a company whether full time or part time
2) Any employee who has a substantial interest in the company i.e. he is holding 20% or more of the voting
power of the company
3) Any employee whose monetary income under the head ‘Salaries’ exceeds Rs.50000 p.a.

Perquisites are:
 Educational facility
 Gas, Electricity or water facility
 Gardener, watchmen, sweeper or any other personal attendant
 Motor Car facility
 Perquisites in case of specified
employees – Sec.17(2)
 Education Facility :
Nature of  Gas ,Electricity & Water Supply- Fully
Taxable Perquisite Taxable
Expenditure

1. Training of employees Exempt

2. Education facility provided
 Sweeper, Gardener, Watchman, personal
to family members Fully Taxable. No Exemption is attendees-Fully Taxable
Payment/reimbursement of available.
tuition fees.
 Any other Perquisite- Fully Taxable.
3. Education facility provided Reasonable cost of education is
taxable. Cost to Employer (–) Amount recovered from
to children of Employee Exemption → Rs 1000 p.m per child.
employee
 MOTOR CAR FACILITY
Perquisite in case used for Taxable Value
Exclusively Business purpose Nothing would be taxable.

Exclusively Personal purpose 10% of Actual Cost of Car

(+) Expenses incurred by employer i.e.
R&M and Driver
(-) amount charged by employer from
employee
Motor car is used partly for performance Refer Table on Next Slide
of duties and partly for private or
personal purpose
 If Motor car is used partly for performance of duties
and partly for private or personal purpose
Motorcar below Motor Car Above
Car owned/hired by If Driver provided by
1.6 ltrs. engine 1.6 ltrs. engine
employer employer, additional
capacity, Taxable capacity, Taxable
amount as below is
value is: value is:
also charged
R&M Expenses are met
Rs. 1,800 Rs. 2400 Rs. 900
or reimbursed by
per month per month per month
Employer
R&M Expenses are met
Rs. 900
by Employee Rs. 600 pm Rs. 900 pm per month
 If employer provided more than one can than treat one car as used for Personal and official use and
others as personal use
 Motor car for going to office and coming back to residence is exempt
 Employee Stock Option Plan (ESOP)

 It means company offers shares to employee at concessional rates.

 Taxable amount:- FMV of shares- Issue price (amount actually paid by employee)
 FMV should be taken on the date on which option is exercised by employee.

AB Co. Ltd. allotted 1000 sweat equity shares to A in June 2021. Shares were allotted at Rs.200 per share as
against FMV of Rs.300 per share on the date of exercise of option by A.
(i) What is the perquisite value of sweat equity shares allotted to A?
(ii)In the case of subsequent sale of those shares by A, what would be COA of those sweat equity shares?
Solution: Value of sweat equity shares = FMV on Exercise Date – Amount Actually paid by the Employee.
Perquisite = (Rs.300 – Rs.200) x 1000 shares = Rs.1,00,000
As per section 49(2AA), where capital gain arises from transfer of sweat equity shares, the cost of acquisition of
such shares shall be the fair market value which has been taken into account for perquisite valuation u/s
17(2)(vi).
Therefore, in case of subsequent sale of sweat equity shares by Ram, COA would be Rs.3,00,000.
 Amended by FA 2020
Contribution by employer to fund and scheme taxable u/s
17(2)(vii)
The amount or aggregate of any contribution made:
• In a recognised provident fund +
• In NPS referred to in section 80CCD(1)+
• In an approved super annuation fund
By the employer to the account of assessee, to the extent it exceeds Rs.750000 shall be
considered as perquisites (Section 17(2)(vii)

Annual accretion by way of interest, dividend etc. to the balance at the credit of fund and
scheme referred to in section 17(2)(vii) and taxable under section 17(2)(viia) - Interest
amount on these accretions also taxable
 Fringe Benefits
1. Loan by Employer to Employee

Loan given by employer to employee at concessional rates of the

interest or without rate of interest.
 Taxable =Loan amount*(SBI interest rate(on the first day of PY i.e. 1 April)- Actual Interest rate)
 Not Taxable:-
(i) IF Loan amount is up to 20000 then interest benefit it is not taxable.
(ii) If loan is taken for treatment of specified disease then interest benefit is not taxable even loan amt. is
more than 20000.
Calculate interest monthly on outstanding monthly balance as on last day of month
 2. Use of Movable Asset

Laptop or Computer or Mobile

• Fully Exempt
Other Assets (TV, AC, Camera etc. other than Car)
• Owned by Employer
• Taxable Amount = 10% of Actual Cost
• Hired by Employer
• Taxable Amount = Hire Charges Paid by Employer
 3. Transfer of Movable Asset

Calculation of Taxable Value

Sale of Particular Motor Car
Computer &
Electronic Items
Any Other

Asset Assets

Cost of Asset
Less: Dep” for Each 20% (WDV) 50% (WDV) 10% (SLM)
Completed Year at the
Rate
Gift of Less: Sale Price
Asset Taxable Value of
Perquisite
 Transfer of Movable Asset
Example
Particular Motor Car Computer & Electronic
Any Other
Items
Assets
Cost of Asset (May 2018) 8,72,000 1,22,000 35,000
Sale Price (June 2020) 5,15,000 25,000 10,000
Calculation of Perquisite Value
Cost of Asset (May 2018) 8,72,000 1,22,000 35,000
Less: Dep” for Each Completed Year
Rate of Dep 20% 50% 10%
For FY 2018-2019 1,74,400 61,250 3,500
For FY 2019-2020 1,39,520 30,625 3,500
Less: Sale Price 5,15,000 25,000 10,000
Taxable Value of Perquisite 43,080 5,625 18,000

Depreciation is deductible for completed years of use only. (Fraction of years → Ignored).
 4. Medical Facility It is not a medical
For Employee or allowance, it is in the
Family member of form of expenditure or
Employee reimbursement

Outside Family member

In India of Employee
India

 Treatment is done  Expense on Medical

in hospital Treatment & Stay -to the  Spouse and
maintained by extent permitted by RBI Children
employer, Govt,  Parents, Brother
 Travel Expenses - If Gross Total
LA, etc. and sisters who
Income of the employee does are dependent
 Exempt
not exceed Rs.2,00,000/- then
 Otherwise travel abroad for patient and
 Taxable attendant(one)- fully Exempt.
 Health Insurance
 Exempt
 5. Gift or Voucher or Coupon

 Gift in cash = Taxable.

 Gift in kind = If FMV of Gift is up to Rs.5000 then it is

fully exempt
 otherwise fully taxable (Excess value above Rs.5000)
Eg: Ram is employed in ABC ltd., his employer gifted him mobile of Rs.25000/- in this case taxable amount
shall be 20000, but if employer has given gift of Rs.25000 in cash entire amount is taxable
 6. Free Food and Non-Alcoholic beverages
Nature of expenditure Taxability of perquisite.
1. Tea or snacks provided during Not a perquisite
working hours
2. Meal provided in office Cost to employer (in excess of
Rs.50) – Amount recovered from
the employee
3. Food & non-alcoholic beverages Not a perquisite if provided in
provided in remote area or an off- working hours
shore installation

Working hours include overtime & working on holidays.

Ex: Mr. X is employed in the office of Chartered Accountant and during the year he was given free lunch on many
occasions and value per lunch is Rs.175. In such case Rs.125 (Rs.175 – Rs.50) per lunch is taxable
PERKS IN ITR Sec. 17(2)
 Profit in lieu of Salary (Sec.17(3))

As per Sec. 17(3), certain payments given by the employer to the employee are
called profit in lieu of salary because it is not appropriate to call such payments as
salary and are as given below:

1. Taxable portion of Retrenchment Compensation or voluntary retirement

2. Amount received by the employee under keyman insurance policy
3. Amount received before taking up the employment or after termination of
the employment
4. Employer contribution and interest thereon to URPF at the time of withdrawal
5. Any other payment notified for this purpose.
Profit in lieu of salary in ITR Sec. 17(3)