cmabdtheblogger: Direct Taxation

Direct Taxation

INCOME FROM SALARY

Part A: Discussion and explanation of the relevant provisions of the Income Tax Act, 1961 with regard to computation of taxable income under the head Income From Salary (i.e. Taxable Salary).

Part B: 30 Illustrations with Solutions.

Part A

How to Compute Income from Salary:

Particulars	Rs	Rs
Different forms of salary		×××
Different forms of allowance		×××
Different forms of perquisite		×××
GROSS SALARY		×××
Less : Deduction u/s 16:
(i) Rs 50,000 or the amount of the salary, whichever is less u/s 16(ia)	(×××)
(ii) Entertainment Allowance u/s 16(ii)	(×××)
(iii) Professional Tax / Tax Paid on Employment u/s 16(iii)	(×××)	(×××)
TAXABLE SALARY		×××

Different forms of Salary:

Sl. No.	Different forms of Salary	Tax Treatment
1	Basic salary and dearness allowance	Fully Taxable
2	Advance salary	Fully Taxable
3	Arrear salary (on receipt basis, if not taxed earlier on due basis)	Fully Taxable
4	Leave salary	Discussed Later
5	Salary in lieu of notice period	Fully Taxable
6	Fees and commission	Fully Taxable
7	Bonus (on receipt basis, if not taxed earlier on due basis)	Fully Taxable
8	Gratuity	Discussed Later
9	Pension	Discussed Later
10	Annuity	Fully Taxable
11	Employer’s contribution to recognised provident fund	Discussed Later
12	Interest credited to recognised provident fund	Discussed Later
13	Lump sum payment received from provident fund at the time of retirement or termination of service	Discussed Later
14	Amount transferred from unrecognised provident fund to recognised provident fund	Discussed Later
15	Retrenchment compensation	Discussed Later
16	Compensation received at the time of voluntary retirement	Discussed Later
17	Profit in lieu of salary	Discussed Later

Different forms of Allowance:

Sl. No.	Different forms of Allowance	Tax Treatment
1	City compensatory allowance	Fully Taxable
2	House rent allowance	Discussed Later
3	Entertainment allowance	Discussed Later
4	Allowances to Govt. employees outside India	Fully Exempt u/s 10 (7)
5	Tiffin allowance, lunch / dinner allowance	Fully Taxable
6	Fixed medical allowance	Fully Taxable
7	Servant allowance (for sweeper, gardener, watchman or personal attendant)	Fully Taxable
8	Special allowances exemption of which depends upon actual expenditure by the employee u/s 10(14)(i) and Rule 2BB:
	a) Travelling allowance	Actual amount incurred for and in connection with employment is exempted
	b) Transfer allowance	------ do -----
	c) Conveyance allowance	------ do -----
	d) Daily allowance	------ do -----
	e) Helper/Assistants allowance	------ do -----
	f) Uniform allowance	------ do -----
	g) Research allowance	------ do -----
	h) Professional development allowance	------ do -----
	i) Education allowance for assessee’s education	------ do -----
9	Special allowances exemption of which does not depend upon actual expenditure u/s 10(14)(ii) and Rule 2BB:
	a) Transport allowance granted to an employee, who is blind [or deaf and dumb] or orthopaedically handicapped with disability of lower extremities, to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty	Exempt up to Rs 3,200 per month
	b) Transport allowance granted to an employee, who is not in the category as described in 9(a) above, to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty	No exemption will be allowed w.e.f. 1.4.2019 and shall apply to assessment year 2019-2020 and subsequent years
	c) Allowance for transport employees	70% of such allowance or Rs 10,000 per month whichever is lower is exempt
	d) Children education allowance	Rs 100 per month per child up to maximum 2 children is exempt
	e) Hostel expenditure allowance	Rs 300 per month per child up to maximum 2 children is exempt
	f) Other allowances	See para:42.3-2 of VKS

Different forms of Perquisite:

Sl. No.	Different forms of Perquisites	Tax Treatment
1	Rent-free unfurnished accommodation	Discussed Later
2	Rent-free furnished accommodation	Discussed Later
3	Accommodation provided at concessional rent	Discussed Later
4	Free domestic servants (sweeper, gardener, watchman, personal attendant)	Discussed Later
5	Free gas, electricity or water supply	Discussed Later
6	Free education	Discussed Later
7	Leave Travel Concession in India	Discussed Later
8	Employees’ obligation met by employer	Discussed Later
9	Amount paid by employer to effect an assurance on the life of employee	Discussed Later
10	Interest-free loan or loan at concessional rate of interest	Discussed Later
11	Use of movable assets	Discussed Later
12	Movable assets sold by employer to his/her employees at a nominal price	Discussed Later
13	Medical facilities	Discussed Later
14	Motor car	Discussed Later
15	Free transport	Discussed Later
16	Free lunch / refreshment	Discussed Later
17	Travelling, touring and accommodation	Discussed Later
18	Gift, voucher or token	Discussed Later
19	Credit card	Discussed Later
20	Club expenditure	Discussed Later
21	Sweat equity shares	Discussed Later
22	Employer’s contribution towards approved superannuation fund	Discussed Later
23	Any other benefit, amenity, etc.	Discussed Later

Leave Salary

1. Leave encashment during continuity of employment is chargeable to tax.

2. Leave encashment at the time of retirement / leaving job –

(a) In case of government employees it is fully exempt from tax u/s 10(10AA) (i).

(b) In case of non-government employees it is exempt from tax on the basis of the least of the following u/s 10(10AA) (ii):

i. [Period of earned leave (in number of months) to the credit of the employee at the time of his retirement or leaving the job] x [Average monthly salary]

ii. 10 x [Average monthly salary]

iii. Rs 3, 00,000

iv. Leave encashment actually received at the time of retirement or leaving the job.

3. Where an employee receives leave salary from two or more employers in the same year, the maximum amount exempt from tax u/s 10(10AA) (ii) will not exceed the amount specified by the Government i.e. Rs 3, 00,000. In cases where an employee, who has received leave salary in any earlier year(s) from his former employer(s), also receives leave salary from his present employer in a later year, the ceiling limit of Rs 3,00,000 will be reduced by the amount of leave salary which has already been exempted u/s 10(10AA)(ii) in any earlier year(s).

4. Leave salary received by the legal heirs of the deceased employee at the time of his/her death is not taxable as salary.

5. Leave salary received by the family of a Government servant who died in harness, is not taxable in the hands of the recipient.

Computation of leave standing to the credit of an employee at the time his retirement or leaving the job:

Number of completed years of service	×××
(x) Rate of earned leave entitlement p.a. (in number of days not exceeding 30 days)	×××
=	×××
(−) Earned leave actually taken or encashed (in number of days) during the period of service	×××
= Leave to the credit of the employee at the time of retirement (in number of days)	×××
(÷)	30
= Leave to the credit of the employee at the time of retirement (in number of months)	×××

Computation of average monthly salary:

Average monthly salary = [Salary drawn during the period of 10 months immediately preceding the retirement] ÷ 10.

Salary for this purpose means:

	Rs
Basic salary	×××
(+) Dearness Allowance (if it is part of salary for computing all the retirement benefits as per the terms of employment)	×××
(+) Commission (if it is determined at a fixed percentage of turnover achieved by the employee)	×××
Salary for this purpose	×××

Important Notes:

1. 1^st day of the 10 months period has to be excluded and the last day has to be included.

2. Salary for fraction of a month = [Salary for the month] x [Number of days ÷ 30].

Gratuity

1. Gratuity received by government employees at the time of retirement is wholly exempt from tax u/s 10(10) (i).

2. Gratuity received by non-government employees at the time of retirement:

(a) Covered by the Payment of Gratuity Act, 1972

The least of the following three is exempt from tax u/s 10(10) (ii):

(i) Monthly salary last drawn x (15 ÷ 26) x Length of service in number of years

(ii) Statutory limit Rs 20, 00,000 (w.e.f. 1^st April, 2018)

(iii) Amount of gratuity actually received

Length of service:

If the period of service is 6 months or less it shall be ignored. Conversely, if the period of service is more than 6 months it shall be taken as one full year.

Salary for this purpose means:

Basic salary + Dearness allowance.

(b) Not covered by the Payment of Gratuity Act, 1972

The least of the following three is exempt from tax u/s 10(10) (iii):

(i) Average monthly salary x (1 ÷ 2) x Number of completed years of service

(ii) Statutory limit Rs 10, 00,000 (w.e.f. 1^st April, 2018)

(iii) Amount of gratuity actually received

Average monthly salary:

Salary drawn during the period of 10 months immediately preceding the month of retirement ÷ 10

Salary for this purpose means:

	Rs
Basic salary	×××
(+) Dearness Allowance (if it is part of salary for computing all the retirement benefits as per the terms of employment)	×××
(+) Commission (if it is determined at a fixed percentage of turnover achieved by the employee)	×××
Salary for this purpose	×××

3. Gratuity paid to an employee while he is in service is not exempt from tax.

4. If an employee, who has received gratuity in any earlier year(s) from his former employer(s), also receives gratuity from more than one employer in the same year or in a later year, the statutory ceiling limit will be reduced by the amount(s) of gratuity which has already been exempted u/s 10(10) (iii) in earlier year(s) as well as in cases of earlier employers.

Pension

1. Uncommuted pension is fully taxable.

2. Commuted pension

(a) Commuted pension received by a government employee: Fully exempt from tax u/s 10(10A) (i)

(b) Commuted pension received by a non-government employee: Exempt u/s 10(10A) (ii) as follows –

(i) If the employee also receives gratuity

Amount exempt from tax = (1÷3) x (Commuted value of full pension)

(ii) If the employee does not receive gratuity

Amount exempt from tax = (1÷2) x (Commuted value of full pension)

House Rent Allowance

1. The least of the following three is exempt from tax under Section 10(13A):

(i) 50% of salary where the residential house is situated at Bombay, Calcutta, Delhi or Madras (40% of salary where the residential house is situated at any other place);

(ii) Actual rent paid − 10% of salary;

(iii) Actual HRA received in respect of the period during which rental accommodation is occupied by the employee during the previous year.

2. Salary for this purpose means:

	Rs
Basic salary	×××
(+) Dearness Allowance (if it is part of salary for computing all the retirement benefits as per the terms of employment)	×××
(+) Commission (if it is determined at a fixed percentage of turnover achieved by the employee)	×××
Salary for this purpose	×××

3. Salary shall be determined on due basis.

4. Salary of the period during which rented accommodation is not occupied in the previous year shall not be considered for the purpose of computing the exemption.

5. Exemption in respect of HRA is not available where an employee

(i) Lives in his own house, or

(ii) Lives in a house for which he does not pay any rent, or

(iii) Pays rent which does not exceed 10% of salary.

6. MODE OF COMPUTATION OF EXEMPTION:

Under section 10(13A), the amount of exemption in respect of house rent allowance received by an employee depends upon the following factors:

(a) Salary of the employee;

(b) House rent allowance;

(d) The place where house is taken on rent.

When these four factors are same throughout the year, the exemption under section 10(13A) should be calculated on “ANNUAL” basis. When, however, there is a change in respect of any of the above factors, the exemption shall be worked out on “MONTHLY” Basis.

Provident Fund

There are four types of provident fund as follows:

1. Statutory Provident Fund

It is set up under the Provident Funds Act, 1925 and maintained by the government and semi-government organisations, local authorities, railways, universities and recognised educational institutions.

2. Recognised Provident Fund

It is set up under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (i.e. in short, the P.F. Act, 1952). As per the P.F. Act, 1952 any establishment employing 20 or more persons is automatically covered by the said Act. But establishments employing less than 20 persons can also join the provident fund scheme covered by the said Act if the employer and employees want to do so.

3. Unrecognised Provident Fund

Any provident fund which is not recognised by the Commissioner of Income-Tax is known as unrecognised provident fund.

4. Public Provident Fund

It is established by the Central Government for the benefit of the general public and to mobilize the personal savings for the industrial development in the country. Any member of the public (whether a salaried employee or a self-employed person) can participate in the fund by opening a provident fund account at the State Bank of India or its subsidiaries or at other nationalized banks. Even salaried employees can simultaneously become member of employees’ provident fund (whether statutory, recognised or unrecognised) and public provident fund. Any amount (subject to minimum of Rs 500 and maximum of Rs 1, 50,000 per annum) may be deposited under this account. The accumulated sum along with compound interest (which is presently at the rate of 8.8 per cent per annum) is repayable after 15 years.

TAX TREATMENT OF PROVIDENT FUND

		Statutory Provident Fund	Recognised Provident Fund	Unrecognised Provident Fund	Public Provident Fund
1	Employer’s contribution to the provident fund	Exempt from tax	Exempt up to 12% of salary [salary = Basic + D.A. (if it is part of salary for computing all the retirement benefits as per the terms of employment) + commission (if it is determined at a fixed percentage of turnover achieved by the employee)]	Exempt from tax	−
2	Deduction u/s 80C on employee’s contribution	Available	Available	Not available	Available
3	Interest credited to the provident fund	Exempt from tax	Exempt up to the amount of interest calculated at the rate of 9.5%	Exempt from tax	Exempt from tax
4	Lump sum payment received from the provident fund at the time of retirement or termination of service	Exempt from tax	Exempt from tax in some cases *(see note below for such cases)*. If not exempt the provident fund will be treated as an unrecognised provident fund from the beginning.	a) Employee’s own contribution is *exempt from tax. b) Interest on employee’s own contribution is taxable under the head Income from other sources. c) Employer’s contribution is taxable under the head Salaries. d) Interest on employer’s contribution is taxable under the head Salaries*.	Exempt from tax

Important Notes:

CASES WHEN LUMP SUM PAYMENT RECEIVED FROM RPF AT THE TIME OF RETIREMENT OR TERMINATION OF SERVICE IS EXEMPT FROM TAX

The lump sum payment at the time of retirement or termination of service received by an employee participating in a Recognised Provident Fund will be exempt from tax in the following situations:

i) If he has rendered continuous service with his employer for a period of 5 years or more. If accumulated balance includes any amount transferred from his account in any other Recognised Provident Fund(s) maintained by his former employer(s), then, in computing the period of 5 years, the period(s) for which the employee rendered continuous service to his former employer(s) is also to be included.

ii) If he is not able to fulfil the above condition due to his service having been terminated by reason of his ill-health or by reason of the contraction or discontinuance of the employer’s business or due to some other reason beyond the control of the employee.

iii) If, on the occasion of his retirement, he gets another employment, to the extent the accumulated balance due and payable to him is transferred to his account in any Recognised Provident Fund maintained by the new employer.

Amount Transferred From URPF to RPF

A part of sum transferred from URPF to RPF is taxable under the head Salaries. Out of the sum transferred, the amount, which would have been liable to tax if the provident fund had been RPF from the date of its institution, shall be deemed to be the income received by the employee in the previous year in which the recognition of the fund takes effect. The remaining amount is not chargeable to tax.

If the employer’s contribution towards the URPF was in excess of the limit specified (i.e. 12% of salary) and/or the interest credited was in excess of 9.5% per annum, then the excess amount shall be taxable in the year in which the URPF is accorded the recognition. If the employer’s contribution was not more than 12% of salary and/or the interest credited was not more than 9.5% per annum, then nothing is taxable out of the transferred balance.

Approved Superannuation Fund

A superannuation fund is a fund, by whatever name called, established or constituted with a sole purpose of making payment of pension or family pension by the employer to his employees. Basically, a superannuation fund is created for retirement benefits to be given to employees by the employer. An approved superannuation fund is a superannuation fund which has been and continues to be approved by the Commissioner of Income Tax in accordance with the rules contained in Part B of the Fourth Schedule of the Income Tax Act, 1961.

TAX TREATMENT OF

APPROVED SUPERANNUATION FUND

1. Employer’s contribution towards an approved superannuation fund is chargeable to tax in the hands of employees to the extent such contribution exceeds Rs 1 lakh per annum. It is taxable in the year in which the contribution is made.

2. Employee’s contribution qualifies for tax deduction u/s 80C.

3. Interest on accumulated balance is exempt from tax.

4. Exemption u/s 10(13) is granted in respect of payment from the fund, provided the payment is made –

(a) To the legal heirs on the death of beneficiary;

(b) To an employee in lieu of or in commutation of an annuity on his retirement at or after the specified age or on his becoming incapacitated prior to such retirement;

(d) By way of refund of contribution to an employee on his leaving the service otherwise than in the circumstances mentioned in (b) above to the extent to which such payment does not exceed the contribution made prior to 1^st April, 1962.

Retrenchment Compensation

Compensation received by a workman at the time of retrenchment is exempt from tax to the extent of the least of the following three, u/s 10(10B):

(i) 15 days’ average salary for every completed year of service or any part thereof in excess of 6 months;

(ii) Statutory limit Rs 5, 00,000;

(iii) Actual amount of retrenchment compensation received. Compensation in excess of the aforesaid limit is taxable as salary. However, the aforesaid limit is not applicable in cases where the compensation is paid under any scheme approved by the Government.

Compensation Received at the Time of Voluntary Retirement

Compensation received at the time of voluntary retirement is exempt from tax if the following conditions are satisfied, u/s 10(10C):

1. Compensation is received or receivable at the time of voluntary retirement or separation.

2. Compensation is received by an employee of the following undertakings –

a) An authority established under a Central, State or Provincial Act;

b) Local authority;

c) University;

d) An Indian Institute of Technology;

e) The State Government;

f) The Central Government;

g) A notified institute having importance throughout India or any State;

h) An Indian Institute of Management and the Indian Institute of Foreign Trade;

i) Public sector company;

j) Any company or a co-operative society.

3. Compensation is received in accordance with the scheme of voluntary retirement or separation which is framed in accordance with the prescribed guidelines.

4. Maximum amount of exemption is Rs 5, 00,000.

5. Where exemption has been allowed to an employee u/s 10(10C) for any assessment year, no exemption there under shall be allowed to him in relation to any other assessment year.

Entertainment Allowance [Sec. 16 (ii)]

1. Entertainment allowance is first included in salary income under the head Salaries and then a deduction is given from the GROSS INCOME FROM SALARY.

2. Entertainment allowance is not deductible in case of NON-GOVERNMENT EMPLOYEES (including employees of statutory corporation and local authority).

3. In case of GOVERNMENT EMPLOYEES the least of the following three is deductible u/s 16(ii):

(i) Rs 5,000;

(ii) 20% of Basic Salary;

(iii) Actual amount of entertainment allowance received during the previous year.

4. Amount actually expended towards entertainment (out of entertainment allowance received) is not to be taken into consideration.

Profits in lieu of salary [Sec. 17(3)]

Profit in lieu of salary is a part of salary income and accordingly it is taxable under the head “Income from Salary”. Profit in lieu of salary means any payment made to an employee in lieu of salary even if the same has no connection with the profits of the employer. The word ‘profit’ is used only to convey any ‘advantage’ or ‘gain’ by receipt of any payment by the employee. As per the Income Tax Act, 1961 “Profit in lieu of salary” includes the following:

1. Any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms & conditions relating thereto is taxable as profit in lieu of salary. The recipient may however claim exemption u/s 10(10B) or 10(10C), if eligible.

2. Any payment (except to the extent it is specifically exempt u/s 10) due to or received by an assessee from his employer or former employer or from a provident fund, or other fund (to the extent it does not consist of contributions made by the assessee or interest thereon) which may otherwise be taxable as income from salary. It may be noted that the assessee is entitled to exemption to the prescribed extent in respect of the following payments received by him –

a. Payment of Gratuity u/s 10(10);

b. Payment of commuted pension u/s 10(10A);

c. Payment of retrenchment compensation u/s 10(10B);

d. Payment from statutory provident fund and public provident fund u/s 10(11);

e. Payment from recognised provident fund u/s 10(12);

f. Payment from an approved superannuation fund u/s 10(13);

g. Payment of House Rent Allowance (HRA) u/s 10(13A).

3. Payment from unrecognised provident fund or superannuation fund to the extent it does not consist of contributions by the employee or interest on employee’s contributions (at the time of payment to the employee).

4. Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy is taxable as “profit in lieu of salary”.

5. Any amount received in lump sum or otherwise from any person prior to his joining employment or after cessation of employment with that person.

Valuation of Rent-free

Unfurnished Accommodation

[Sec. 17(2) (i)]

A. In case of Government Employees

The value of perquisite in respect of accommodation provided to such employees is determined in accordance with the rules framed by the Government. It may be mentioned that rent-free official residence provided to a Judge of a High Court or to a Judge of the Supreme Court is exempt from tax. A similar exemption is extended to an official of Parliament, a Union Minister and a Leader of Opposition in Parliament.

B. In case of Non-Government Employees

(Including employees of local authority or foreign Government)

1. Basis of valuation as per Rule 3(1):

	Population of the city (as per 2001 census)	If the accommodation is owned by the employer	If the accommodation is *taken on lease by the employer*
1	Exceeding 25 lakh [Population > 25 lakh]	*15% of salary* for the period during which the accommodation is occupied by the employee	*Lease rent paid/payable or* *15% of salary* for the period during which the accommodation is occupied by the employee, *whichever is lower*
2	Exceeding 10 lakh but not exceeding 25 lakh [25 lakh ≥ P > 10 lakh]	*10% of salary* for the period during which the accommodation is occupied by the employee	Same as above
3	Up to 10 lakh (i.e. not exceeding 10 lakh) [Population ≤ 10 lakh]	*7.5% of salary* for the period during which the accommodation is occupied by the employee	Same as above

2. Salary for this purpose includes –

a) Basic salary;

b) Dearness allowance/pay, if it is part of salary for computing all the retirement benefits as per the terms of employment;

c) Bonus;

d) Commission;

e) Fees;

f) All other taxable allowances (excluding amount not taxable); and

g) Any other monetary payment which is chargeable to tax (by whatever name called).

3. Salary for this purpose does not include –

a) Dearness allowance/pay, if it is not part of salary for computing all the retirement benefits as per the terms of employment;

b) Employer’s contribution to provident fund and interest credited to provident fund;

c) All allowances which are exempt from tax;

d) Value of perquisites; and

e) Lump-sum payments received at the time of termination of service or superannuation or voluntary retirement (e.g. gratuity, leave encashment, commutation of pension, retrenchment compensation and similar payments).

4. Salary shall be determined on ACCRUAL BASIS.

5. Salary from multiple employers

Salary from all employers in respect of the period during which an accommodation is provided will be taken into consideration.

Valuation of Rent-free

Furnished Accommodation

[Sec. 17(2) (i)]

1. Furnished accommodation not being in a hotel

STEP: 1

Valuation of the perquisite on the assumption that the accommodation is unfurnished

STEP: 2

To the above value add value of furniture as follows:

a) 10% per annum of the original cost of furniture, if furniture is owned by the employer;

b) Actual hire charges paid or payable, if furniture is hired by the employer.

2. Furnished accommodation in a hotel

The value of the perquisite is determined on the basis of lower of the following two:

a) 24% of salary paid or payable for the period during which such accommodation is provided in the previous year.

b) Actual charges paid or payable by the employer to such hotel.

Exception

In the case of an accommodation provided in a hotel, nothing is chargeable to tax if the following two conditions are satisfied:

1) The accommodation is provided for a total period not exceeding 15 days in aggregate in the previous year; and

2) The accommodation is provided on an employee’s transfer from one place to another.

If in the case of an accommodation provided in a hotel on an employee’s transfer from one place to another the accommodation is provided for more than 15 days, the perquisite is not taxable for the first 15 days, but after that it is chargeable to tax.

As per Rule 3(1) of the Income Tax Act,

Exception: 1

The value of any accommodation provided to an employee working at a mining site or an on-shore oil exploration site or a project execution site or a dam site or a power generation site or an off-shore site will not be treated as a perquisite if:

i) Such accommodation is located in a remote area or,

ii) Where it is not located in a remote area, the accommodation is of a temporary nature having plinth area of not more than 800 square feet and should not be located within 8 kilometres of the local limits of any municipality or cantonment board.

A “project execution site” here means a site of project up to the stage of its commissioning.

A “remote area” here means an area located at least 40 kilometres away from a town having a population not exceeding 20,000 as per the latest published all-India census.

Exception: 2

Where on account of his transfer from one place to another, the employee is provided with accommodation at the new place of posting while retaining the accommodation at the other place, the value of perquisite shall be determined with reference to only one such accommodation which has the lower value with reference to the Table above for a period not exceeding 90 days and thereafter the value of perquisite shall be charged for both such accommodations in accordance with the Table.

Valuation of Accommodation Provided at Concessional Rent [Sec. 17(2) (ii)]

STEP: 1

Find out the value of the perquisite on the assumption that no rent is charged by the employer (the accommodation may be furnished or unfurnished or may be provided in a hotel).

STEP: 2

From the value so arrived at, deduct the rent charged by the employer from the employee. The balance amount (if positive) is the taxable value of the perquisite in respect of the concession in rent.

Valuation of Free Domestic Servants (Sweeper, Gardener, Watchman or Personal Attendant)

1. Value of free domestic servants =

The total amount of salary paid or payable by the employer to such domestic servants

LESS: Any amount recovered from the employee for such services

2. Value of free domestic servants is not taxable if the employee is a non-specified employee.

3. If the domestic servant is appointed by the employee, actual cost of such domestic servant incurred or reimbursed by the employer shall be taxable in the hands of all employees (both specified and non-specified)

4. If rent-free accommodation (owned by the employer) is provided with gardener, gardener's salary and maintenance cost of garden shall not be taxable in the hands of the employee.

5. Domestic servant allowance given to an employee is always chargeable to tax.

Valuation of Free Gas, Electric Energy or Water Supply

1. Value of free gas, electric energy or water supply =

Actual cost to the employer

LESS: Any amount recovered from the employee

2. Actual cost to the employer may be -

(a) Amount paid or payable by the employer to the outside agency, or

(b) Manufacturing cost per unit incurred by the employer.

3. Value of free gas, electric energy or water supply is not taxable if the employee is a non-specified employee.

Valuation of Free Education

1) Amount spent for providing free educational facilities to, and free training of, the employee is not taxable.

2) School fees of the family members of the employee paid by the employer directly to the school are taxable as a perquisite in the hands of all specified employees.

3) Reimbursement of expenditure incurred for education of the family members of the employee is taxable as a perquisite in the hands of all specified employees.

4) Taxability of different education facilities in employer’s institute:

	*DIFFERENT FORMS OF FACILITIES*	*AMOUNT CHARGEABLE TO TAX*
(i)	Educational facility is provided to employee’s children and the cost of such educational facility does not exceed Rs 1,000 per month per child (no restriction on number of children)	NIL
(ii)	Educational facility is provided to employee’s children and the cost of such educational facility exceeds Rs 1,000 per month per child (no restriction on number of children)	Cost of such education in a similar institution in or near the locality LESS: Rs 1,000 per month per child LESS: Any amount recovered from the employee
(iii)	Educational facility is provided to members of the employee’s family (other than children)	Cost of such education in a similar institution in or near the locality LESS: Any amount recovered from the employee

5. Value of free education is not taxable if the employee is a non-specified employee.

Valuation of Leave Travel Concession (LTC) in India

1. Value of leave travel concession / assistance =

Leave travel concession / assistance received or due to be received by the assessee

LESS: Actual expenditure incurred for the purpose of such travel or the amount specified in Rule: 2B, whichever is less.

2. AMOUNT SPECIFIED IN RULE: 2B

	*DIFFERENT SITUATIONS*	*AMOUNT SPECIFIED*
(i)	Where the journey is performed by air	Economy class air fare of the national carrier by the shortest route
(ii)	Where the journey is performed by rail	AC-First class rail fare by the shortest route
(iii)	Where the places of origin and destination of the journey are connected by rail and the journey is performed by any other mode of transport	AC-First class rail fare by the shortest route
(iv)	Where the places of origin and destination of the journey (or part thereof) are not connected by rail but a recognised public transport system exists	First class or Deluxe class fare by the shortest route
(v)	Where the places of origin and destination of the journey (or part thereof) are not connected by rail and no recognised public transport system exists	AC-First class rail fare by the shortest route

3. Valuation of leave travel concession is to be done with respect to an individual and his family where “family” in relation to the individual means (a) The spouse and children of the individual; (b) The parents, brothers and sisters of the individual who are wholly or mainly dependent on him.

4. Exemption in valuation of leave travel concession is available in respect of two journeys performed in a block of four calendar years. The different blocks are: 2010-2013, 2014-2017, and 2018-2021.

5. If an assessee has not availed leave travel concession during any of the specified four-year blocks on one of the two permitted occasions (or on both the occasions), exemption can be claimed in the first calendar year of the next block (but in respect of only one journey). In such a case, the carry-over exemption so availed will not be counted for the purpose of claiming the future exemptions allowable in respect of two journeys in the subsequent block.

6. No exemption in valuation of leave travel concession can be claimed without performing any journey and incurring expenses thereon.

7. The exemption in valuation of leave travel concession is strictly limited to expenses on air fare, rail fare and bus fare only. No other expenses, like scooter or taxi charges at both ends, porterage expenses during the journey and lodging / boarding expenses are qualified for such exemption.

8. The exemption in valuation of leave travel concession will be admissible to all surviving children born before 1^st October, 1998 and to only two surviving children born on or after 1^st October, 1998. In reckoning this limit of two children, children born out of multiple births after the first child will be treated as one child only.

9. Value of leave travel concession is not taxable if the employee is a non-specified employee.

Valuation of interest-free loan or loan at concessional rate of interest

1. Taxable value of the perquisite may be determined as follows:

STEP: I

Find out the “maximum outstanding monthly balance” (i.e. the aggregate outstanding balance for each loan as on the last day of each month).

STEP: 2

Find out the rate of interest charged by the SBI as on the first day of the relevant previous year in respect of loan for the same purpose advanced by it.

STEP: 3

Calculate interest for each month of the previous year on the outstanding amount as arrived at above at the rate of interest determined above.

STEP: 4

From the total interest calculated for the entire previous year, deduct interest actually recovered, if any, from the employee during the previous year.

2. In the following cases the perquisite is not chargeable to tax:

(a) If a loan is made available for medical treatment in respect of diseases specified in Rule: 3A. The exemption is, however, not applicable to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

(b) Where the amount of original loan (or loans) does not exceed in the aggregate Rs 20,000.

3. The perquisite is taxable in the hands of all employees (whether specified or not).

Valuation of perquisite in respect of use of movable assets

*Particulars*	Rs
1. Value of perquisite in respect of use of movable assets =
Cost to the employer	×××
LESS: Amount recovered from the employee	×××
VALUE OF THE PERQUISITE	×××

2. Cost to the employer means −

(a) WHEN ASSET IS OWNED BY THE EMPLOYER

10% p.a. of the original cost of the asset

(b) WHEN ASSET IS TAKEN ON HIRE BY THE EMPLOYER

Amount of rent paid or payable by the employer

3. In case of computers / laptops the value of the perquisite will be nil.

4. The perquisite is taxable in the hands of all employees (whether specified or not).

Valuation of perquisite in respect of movable asset Sold by an employer to its employees at a nominal price

*Particulars*	Rs
1. Value of perquisite in this case =
Original cost of the asset	×××
LESS: Depreciation for all the completed years during which the asset was used by the employer for his business	×××
LESS: Amount recovered from the employee	×××
VALUE OF THE PERQUISITE	×××

2. RATE AND METHOD OF DEPRECIATION

*Type of asset*	*Rate of depreciation*	*Method of depreciation*
(i) Electronic items and computers	50% p.a.	WDV
(ii) Motor cars	20% p.a.	WDV
(iii) Any other assets	10% p.a.	SLM

3. Depreciation for a part of the year is not taken into consideration.

4. Electronic items means data storage and handling devices like computers, digital diaries and printers. They do not include household appliances like washing machines, microwave ovens, mixers, TV sets, fridges, etc.

5. The perquisite is taxable in the hands of all employees (whether specified or not).

Valuation of medical facilities

1. The perquisite in respect of medical facilities is taxable in the hands of only specified employees.

2. For the purpose of valuation of the perquisite in respect of medical facilities, “family” means −

(a) The spouse and children of the individual; and

(b) The parents, brothers and sisters of the individual who are dependent on the individual.

3. TAX TREATMENT OF MEDICAL FACILITIES IN INDIA

	*Nature of medical facility*	*Condition*	*Tax treatment*
i	Any medical facility made available to employees and their family members cost of which incurred by the employer	Hospital is maintained by the employer	Fully exempt
ii	Any medical facility made available to employees and their family members cost of which incurred or reimbursed by the employer	Hospital is maintained by − a. Central/State Govt. b. Local authority c. Any other person but approved by the Govt. for treatment of its employees	Fully exempt
iii	Treatment of prescribed diseases given in Rule 3A(2) cost of which incurred or reimbursed by employer	Hospital is approved by the Chief Commissioner as per prescribed guidelines	Fully exempt
iv	Medical insurance premium paid or reimbursed by the employer	Covered by recognised health insurance policy	Fully exempt
v	Any medical facility made available to employees and their family members cost of which incurred or reimbursed by employer	Hospital is maintained by any other person (e.g. a private clinic)	Fully taxable w.e.f. 1- 4- 2019

Note: For the purpose of above Table “Hospital” includes clinic, dispensary or nursing home.

4. TAX TREATMENT OF MEDICAL FACILITIES OUTSIDE INDIA INCURRED OR REIMBURSED BY THE EMPLOYER

	*Perquisite* *not chargeable to tax*	*Condition for and limit of exemption*
i	*Cost of medical treatment* of employee or any member of family of such employee outside India	Expenditure shall be exempt only to the extent permitted by the RBI
ii	*Cost of travel* of the employee or any member of family of such employee and one attendant who accompanies the patient in connection with the medical treatment outside India	Expenditure shall be exempt only in the case of an employee whose GTI (before including therein the expenditure on such travelling) does not exceed Rs 2,00,000
iii	*Cost of staying* abroad of the employee or any member of family of such employee and one attendant who accompanies the patient in connection with the medical treatment outside India	Expenditure shall be exempt only to the extent permitted by the RBI

Valuation of perquisite in respect of Motor Car

*DIFFERENT SITUATIONS*	*VALUE OF THE PERQUISITE*
I. CAR IS OWNED BY EMPLOYEE
A. Running and maintenance by employee	Not a perquisite
B. Running and maintenance by employer
(i) Car is used wholly for official purpose	Not a perquisite if LOG BOOK is maintained and certified by employer
(ii) Car is used wholly for private purpose	Actual expenditure incurred by employer LESS: Amount recovered from employee
(iii) Car is used partly for official and partly for private purpose	Actual expenditure incurred by employer LESS: Rs 1800 p.m. if the engine capacity is up to 1.6 litres or 1600 cc. [Rs 2400 p.m. if the engine capacity exceeds 1.6 litres or 1600 cc.] LESS: Rs 900 p.m. for driver LESS: Amount recovered from employee
II. CAR IS OWNED OR HIRED BY EMPLOYER
A. Running and maintenance by employee
(i) Car is used wholly for official purpose	Not a perquisite if LOG BOOK is maintained and certified by employer
(ii) Car is used wholly for private purpose	Hire charges for the car or 10% of the original cost of the car, as the case may be ADD: Salary of driver, if any, paid or payable by employer LESS: Amount recovered from employee
(iii) Car is used partly for official and partly for private purpose	Rs 600 p.m. if the engine capacity is up to 1.6 litres or 1600 cc. [Rs 900 p.m. if the engine capacity exceeds 1.6 litres or 1600 cc.] ADD: Rs 900 p.m. if driver is provided by employer
B. Running and maintenance by employer
(i) Car is used wholly for official purpose	Not a perquisite if LOG BOOK is maintained and certified by employer
(ii) Car is used wholly for private purpose	Actual expenditure incurred by employer [i.e. Hire charges for the car or 10% of the original cost of the car, as the case may be ADD: Salary of driver, if any, paid or payable by employer ADD: running and maintenance expenses met or reimbursed by employer] LESS: Amount recovered from employee
(iii) Car is used partly for official and partly for private purpose	Rs 1800 p.m. if the engine capacity is up to 1.6 litres or 1600 cc. [Rs 2400 p.m. if the engine capacity exceeds 1.6 litres or 1600 cc.] ADD: Rs 900 p.m. if driver is provided by employer
III. EMPLOYEE OWNS ANY AUTOMOTIVE CONVEYANCE (OTHER THAN CAR)
A. Running and maintenance by employee	Not a perquisite
B. Running and maintenance by employer
(i) Used wholly for official purpose	Not a perquisite if LOG BOOK is maintained and certified by employer
(ii) Used wholly for private purpose	Actual expenditure incurred by employer LESS: Amount recovered from employee
(iii) Used partly for official and partly for private purpose	Actual expenditure incurred by employer LESS: Rs 900 p.m. LESS: Amount recovered from employee

IMPORTANT NOTES ON VALUATION OF PERQUISITE IN RESPECT OF MOTOR CAR

1. When two or more cars are allowed to the employee by the employer and the employee is allowed to use the cars wholly or partly for private purpose −

(i) In respect of one of such cars (as selected by the employee), the value of perquisite shall be the amount calculated in a way as if the car (being owned or hired by the employer) has been used by the employee partly for official and partly for private purpose.

(ii) In respect of other remaining car or cars, the value of perquisite shall be the amount calculated in a way as if the car or cars (being owned or hired by the employer) has / have been used by the employee wholly for private purpose.

2. The use of motor car by an employee for the purpose of going from his residence to the office or from office back to his residence is not chargeable to tax.

3. The perquisite is not taxable if the employee is a non-specified employee.

4. The word “month” in the above table denotes completed month, and a part of the month is not to be taken into consideration.

Valuation of perquisite in respect of free transport

1. Free transport benefit offered to the employees of railways and airlines by the respective employers is not chargeable to tax. In case of employees of any other transport undertaking the value of perquisite in respect of free transport will be computed as follows:

Value of perquisite =

Value at which such benefit is offered by the employer to the public

LESS: Amount recovered from the employee

2. The perquisite is not taxable if the employee is a non-specified employee.

Valuation of perquisite in respect of free lunch / refreshment

1. Tea or similar non-alcoholic beverages and snacks (in the form of light refreshments) during working hours are not charged to tax as perquisite.

2. Food and non-alcoholic beverages (in the form of meals) during working hours should be treated as perquisite valuation of which is to be made as follows:

Value of perquisite =

Cost to the employer

LESS: Rs 50 per meal

LESS: Amount recovered from the employee

3. If any lunch allowance, dinner allowance or refreshment allowance is given to an employee, it is always chargeable to tax.

Valuation of perquisite in respect of travelling, touring, accommodation

[Including holiday home facility (not being leave travel concession)]

Value of perquisite =

Cost to the employer

(a) Actual expenditure [if allowed uniformly to all employees], or

(b) Value of similar facility offered by other undertakings [If not allowed uniformly to all employees]

LESS: Amount recovered from the employee

Valuation of perquisite in respect of gift, voucher or token

1. Gift in cash or gifts convertible into money (like gift cheque) are fully taxable.

2. Gift in kind (including voucher or token) up to Rs 5,000 in aggregate p.a. would be exempt, beyond which it would be taxable as perquisite. In other words, where the value of gift in kind (including voucher or token) is below Rs 5,000 in aggregate during the previous year, the value of perquisite shall be taken to be nil, whereas if the value of such gift exceeds Rs 5,000 in aggregate during the previous year, the excess over Rs 5,000 would be taxable as perquisite.

Valuation of perquisite in respect of credit card

Value of perquisite =

Expenditure incurred by the employer in respect of credit card used by the employee or any member of his household

LESS: Expenditure on use wholly and exclusively for official purposes as certified by the employer

LESS: Amount recovered from the employee

Valuation of perquisite in respect of club expenditure

1. Value of perquisite =

Expenditure incurred by the employer in respect of club facility used by the employee or any member of his household

LESS: Expenditure on use wholly and exclusively for official purposes as certified by the employer

LESS: Amount recovered from the employee

2. Expenditure incurred by the employer includes any expenditure on club facility used by the employee or any member of his household which is paid or reimbursed by the employer.

3. Expenditure incurred by the employer includes amount of annual or periodical fees paid or payable to a club.

4. Health club facilities, sports club facilities, etc. provided uniformly to all classes of employees by the employer at employer’s premises are exempt. Consequently, expenditure on such facilities is not chargeable to tax.

5. The initial one-time deposits or fees for corporate or institutional membership, where benefit does not remain with a particular employee after cessation of employment, are exempt from tax.

Valuation of perquisite in respect of sweat equity shares [Sec. 17(2) (v i)]

CONDITIONS:

The value of sweat equity shares is taxable in the hands of employees, if the following conditions are satisfied:

1. The security or shares involved are “specified security” or “sweat equity shares”. For this purpose, “specified security” means “shares, scrips, debentures, units, Govt. securities, etc.” “Sweat equity shares” means “equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.”

2. The specified security or sweat equity shares are allotted or transferred on or after 1.4.2009.

3. The specified security or sweat equity shares are allotted by the employer or former employer of the employee.

4. The specified security or sweat equity shares may be transferred to the employee or former employee directly or indirectly.

5. The specified security or sweat equity shares are transferred to the employee either free of cost or at a concessional rate.

VALUE OF PERQUISITE:

If the above conditions are satisfied, perquisite will be taxable in the hands of employee in the assessment year relevant to the previous year in which shares or securities are allotted or transferred to the employee.

Value of perquisite =

[Number of shares or securities for which option to purchase has been exercised by the employee] ×

[Fair market value of the shares or securities on the date of exercise of the option to purchase − Pre-determined price of the shares or securities fixed by the company as the price to be recovered from the employee.]

Valuation of perquisite in respect of any other benefit, amenity, etc

1. This is a residual head. It covers any other benefit or amenity, service, right or privilege provided by any employer. However, it does not cover any perquisite, which has already been discussed above. The value of benefit, amenity, service, right or privilege which come under this residual head, shall be determined on the basis of cost to the employer as reduced by the amount recovered from the employee, if any.

2. The perquisite in respect of expenditure of the employer for telephone / mobile phone of the employee is not chargeable to tax.

Professional tax or tax on employment [Sec. 16 (iii)]

1. Professional tax or tax on employment, levied by a State Government, is allowed as deduction from gross salary. Deduction is available only in the year in which the professional tax is paid.

2. If the professional tax is paid by the employer on behalf of an employee, it is first included in the salary of the employee as a “perquisite” (since it is an obligation of the employee discharged by the employer) and then the same amount is allowed as deduction on account of “professional tax” from the gross salary.

Specified / Non-specified employees

Non-specified employee

Any employee, who is not a specified employee, is a non-specified employee.

Specified employee

The following employees are known as specified employees −

1. A DIRECTOR−EMPLOYEE

An employee, who is a director in the employer-company at any time during the previous year, is a specified employee of the company in which he is a director.

2. AN EMPLOYEE WHO HAS SUBSTANTIAL INTEREST IN THE EMPLOYER-COMPANY

An employee who has a substantial interest in the employer-company at any time during the previous year is a specified employee of the company. A person has substantial interest in the employer-company, if he is a beneficial owner of equity shares carrying 20% or more voting power in the company.

3. AN EMPLOYEE DRAWING IN EXCESS OF Rs 50,000

An employee (not covered by the above two categories), whose income chargeable under the head “Salaries” (exclusive of the value of all benefits or amenities not provided by way of monetary payments) exceeds Rs 50,000, is a specified employee. For computing the sum of Rs 50,000, the following are excluded or deducted:

a) All non-monetary benefits (i.e. perquisites);

b) Monetary benefits which are not taxable u/s 10 (i.e. exempted allowances); and

c) Deduction on account of entertainment allowance and professional tax.

Where salary is received from more than one employer during the relevant previous year, the aggregate salary from all these employers will have to be taken into account for the purpose of determining the aforesaid monetary ceiling.

Part B

Direct Taxation

Income from Salary

Selected Problems

Illustration: 1

Ashok, an employee of ABC Ltd., receives Rs 8, 05,000 as gratuity under the Payment of Gratuity Act, 1972. He retires on 10th September, 2022 after rendering service for 35 years and 7 months. The last drawn salary was Rs 32,700 per month. Calculate the amount of gratuity chargeable to tax.

Solution: 1

Computation of taxable gratuity of Mr. Ashok

For the A.Y. 2023-24

Particulars	Rs	Rs
Gratuity received		8,05,000
Less: Exemption u/s 10(10) (ii)– least of the following three:
a) Rs 32,700 × ¹⁵/₂₆ × 36 (Salary last drawn × ¹⁵/₂₆ × Length of service)	6,79,154
b) Statutory limit	20,00,000
c) Actual gratuity received	8,05,000	6,79,154
Taxable gratuity		1,25,846

Illustration: 2

Mr. Oldman retired from his job after 29 years 6 months and 15 days of service on 17/12/2022 and received gratuity amounting Rs 4, 00,000. His salary at the time of retirement was basic Rs 6,000 p.m., dearness allowance Rs 1,200 p.m., House rent allowance Rs 2,000, Commission on turnover 1%, Commission on profit Rs 5,000. He got an increment on 1/4/2022 of Rs 1,000 p.m. in basic. Turnover achieved by assessee Rs 1, 00,000 p.m. Calculate his taxable gratuity if he is a —

a) Government employee;

b) Non-Government employee, covered by the Payment of Gratuity Act;

c) Non-Government employee not covered by the Payment of Gratuity Act

Solution: 2

Case (a)

Taxable gratuity of Mr. Oldman, a Government employee, for the A.Y. 2023-24 is Nil u/s 10(10) (i).

Case (b)

Computation of taxable gratuity of Mr. Oldman

For the A.Y. 2023-24

Particulars	Rs	Rs
Gratuity received		4,00,000
Less: Exemption u/s 10(10) (ii) least of the following three:
a) Rs 7,200 × ¹⁵/₂₆ × 30 (Salary last drawn × ¹⁵/₂₆ × Length of service)	1,24,615
b) Statutory limit	20,00,000
c) Actual gratuity received	4,00,000	1,24,615
Taxable gratuity		2,75,385

Case (c)

Computation of taxable gratuity of Mr. Oldman

For the A.Y. 2023-24

Particulars	Rs	Rs
Gratuity received		4,00,000
Less: Exemption u/s 10(10) (iii) least of the following three:
a) Rs 8,000 × ½ × 29 (Av. Monthly Salary × ½ × Years of service)	1,16,000
b) Statutory limit	10,00,000
c) Actual gratuity received	4,00,000	1,16,000
Taxable gratuity		2,84,000

Working notes:

Computation of Average Monthly Salary for the period 1.2.2022 to 30.11.2022

Particulars	Rs	Rs
Basic salary:
For the period 1.2.2022 to 31.3.2022 [Rs 5,000 × 2]	10,000
For the period 1.4.2022 to 30.11.2022 [Rs 6,000 × 8]	48,000	58,000
Dearness allowance: [1,200 × 10]		12,000
Commission on turnover: (Rs 1,00,000 × 10 × 1%]		10,000
Total for 10 months		80,000
Average monthly salary [Rs 80,000 ÷ 10]		8,000

Illustration: 3

Mrs. X is working with ABC Ltd. since last 30 years 9 months. Her salary structure is as under:

i) Basic: Rs 5,000 p.m. and ii) Dearness allowance: Rs 3,000 p.m. On 15/12/2022, she died. State the treatment of gratuity in following cases:

Case 1: Mrs. X retired on 10/12/2022 & gratuity of Rs 4, 00,000 was received by her husband (legal heir) as on 18/12/2022.

Case 2: Husband of Mrs. X received the gratuity on 18/12/2022 falling due after death of Mrs. X.

Mrs. X is covered by the Payment of Gratuity Act.

Solution: 3

Case: 1

Computation of taxable gratuity of Mrs. X

For the A.Y. 2023-24

Particulars	Rs	Rs
Gratuity received		4,00,000
Less: Exemption u/s 10(10) (ii) least of the following three:
a) Rs 8,000 × ¹⁵/₂₆ × 31 (Salary last drawn × ¹⁵/₂₆ × Length of service)	1,43,077
b) Statutory limit	20,00,000
c) Actual gratuity received	4,00,000	1,43,077
Taxable gratuity		2,56,923

Case: 2

Not taxable because the gratuity became due after the death of Mrs. X.

Illustration: 4

a) Mr. Bhanu is working in Zebra Ltd. since last 25 years 9 months. Company allows 2 months leave for every completed year of service to its employees. During the job, he had availed 20 months leave. At the time of retirement on 10/8/2022, he got Rs 1, 50,000 as leave encashment. As on that date, his basic salary was Rs 5,000 p.m., D.A. was Rs 2,000 p.m.; Commission was 5% on turnover + Rs 2,000 p.m. (Fixed p.m.). Turnover affected by the assessee during last 12 months (evenly) Rs 5, 00,000. Bhanu got an increment of Rs 1,000 p.m. from 1/1/2022 in basic and Rs 500 p.m. in D.A. Compute his taxable leave encashment salary.

b) How shall your answer differ if the assessee had taken 2 months leave instead of 20 months, during his continuation of job?

Solution: 4

Case (a)

Computation of taxable leave salary of Mr Bhanu

For the A.Y. 2023-24

Particulars	Rs	Rs
Leave encashment received		1,50,000
Less: Exemption u/s 10(10AA) (ii) least of the following four:
a) Rs 8,683 × 5 (Av. Monthly Salary × Balance of leave in months)	43,415
b) Rs 8,683 × 10 (Av. Monthly Salary × 10)	86,830
c) Statutory limit	3,00,000
d) Actual leave encashment received	1,50,000	43,415
Taxable leave salary		1,06,585

Working notes:

1. Computation of leave standing to the credit of

Mr Bhanu at the time his retirement:

Number of completed years of service	25
(x) Rate of earned leave entitlement p.a. (in days not exceeding 30 days)	30
=	750
(−) Earned leave actually taken or encashed (in days) during the period of service (20 × 30)	600
= Leave to the credit of Mr Bhanu at the time of retirement (in days)	150
(÷)	30
= Leave to the credit of Mr Bhanu at the time of retirement (in months)	5

2. Computation of average monthly salary:

	Basic (Rs)	DA (Rs)	Total (Rs)
For the period: 11.10.21 – 31.12.21:
Basic (4,000 ÷ 30) × 20 + (4,000 × 2)	10,667		10,667
DA (1,500 ÷ 30) × 20 + (1,500 × 2)		4,000	4,000
For the period: 1.1.22 – 10.08.22:
Basic (5,000 × 7) + (5,000 ÷ 30) × 10	36,667		36,667
DA (2,000 × 7) + (2,000 ÷ 30) × 10		14,667	14,667
Total [Basic + DA]			66,001
Add: Commission [(5,00,000 ÷ 12) × 10 × 5%]			20,833
Total [Basic + DA + Commission]			86,834
Average monthly salary [86,834 ÷ 10]			8,683

Case (b)

Computation of taxable leave salary of Mr Bhanu

For the A.Y. 2023-24

Particulars	Rs	Rs
Leave encashment received		1,50,000
Less: Exemption u/s 10(10AA) (ii) least of the following four:
a) Rs 8,683 × 23 (Av. Monthly Salary × Balance of leave in month)	1,99,709
b) Rs 8,683 × 10 (Av. Monthly Salary × 10)	86,830
c) Statutory limit	3,00,000
d) Actual leave encashment received	1,50,000	86,830
Taxable leave encashment		63,170

Working notes:

1. Computation of leave standing to the credit of

Mr Bhanu at the time his retirement:

Number of completed years of service	25
(x) Rate of earned leave entitlement p.a. (in days not exceeding 30 days)	30
=	750
(−) Earned leave actually taken or encashed (in days) during the period of service (2 × 30)	60
= Leave to the credit of Mr Bhanu at the time of retirement (in days)	690
(÷)	30
= Leave to the credit of Mr Bhanu at the time of retirement (in months)	23

2. Computation of average monthly salary: Same as in Case (a)

Illustration: 5

Mr. Das retired on 31/3/2023. At the time of retirement, 18 months leave was lying to the credit of his account. He received leave encashment equivalent to 18 months Basic salary Rs 1, 26,000. His employer allows him 1½ months leave for every completed year of service. During his tenure, he availed of 12 months leave. At the time of retirement, he also gets D.A. Rs 3,000. His last increment of Rs 1,000 in basic was on 1/4/2022. Find taxable leave encashment.

Solution: 5

Computation of taxable leave salary of Mr. Das

For the A.Y. 2023-24

Particulars	Rs	Rs
Leave encashment received		1,26,000
Less: Exemption u/s 10(10AA) (ii) least of the following four:
a) Rs 10,000 × 8 (Av. Monthly Salary × Balance of leave in month)	80,000
b) Rs 10,000 × 10 (Av. Monthly Salary × 10)	1,00,000
c) Statutory limit	3,00,000
d) Actual gratuity received	1,26,000	80,000
Taxable leave encashment		46,000

Working notes:

1. Computation of number of completed years of service:

Balance of leave in months at the time of retirement	18
Add: Leave availed in months during service	12
∴ Total privilege leave earned in months during service	30
Privilege leave entitlement in months for every completed year of service	1½
∴ Number of completed years of service (30 ÷ 1½)	20

2. Computation of leave standing to the credit of an employee at the time his retirement or leaving the job:

Number of completed years of service	20
(x) Rate of earned leave entitlement p.a. (in days not exceeding 30 days)	30
=	600
(−) Earned leave actually taken or encashed (in days) during the period of service (12 × 30)	360
= Leave to the credit of the employee at the time of retirement (in days)	240
(÷)	30
= Leave to the credit of the employee at the time of retirement (in months)	8

3. Computation of average monthly salary:

Basic salary per month (Rs 1,26,000 ÷ 18)	Rs 7,000
Add: Dearness allowance per month	Rs 3,000
Average monthly salary	Rs 10,000

Illustration: 6

Mr. Amit has retired from his job on 31/3/2022. From 1/4/2022, he was entitled to a pension of Rs 3,000 p.m. On 1/8/2022, he got 80% of his pension commuted and received Rs 1, 20,000. Compute taxable pension if he is:

a) A Government employee;

b) A Non-Government employee & not receiving gratuity: and

c) A Non-Government employee (receiving gratuity, but not covered by the Payment of Gratuity Act)

Solution: 6

Case (a)

Computation of taxable pension of Mr. Amit

For the A.Y. 2023-24

Particulars	Rs	Rs
Uncommuted pension:
For the period 1.4.2022 to 31.7.2022 [Rs 3,000 × 4]	12,000
For the period 1.8.2022 to 31.3.2023 [Rs 3,000 × 20% × 8]	4,800	16,800
Commuted pension:
Received	1,20,000
Less: Exemption u/s 10(10A) (i) [Fully exempt from tax]	1,20,000	Nil
Taxable pension		16,800

Case (b)

Computation of taxable pension of Mr. Amit

For the A.Y. 2023-24

Particulars	Rs	Rs
Uncommuted pension:
For the period 1.4.2022 to 31.7.2022 [Rs 3,000 × 4]	12,000
For the period 1.8.2022 to 31.3.2023 [Rs 3,000 × 20% × 8]	4,800	16,800
Commuted pension:
Received	1,20,000
Less: Exemption u/s 10(10A) (ii) [Rs 1,20,000 × ¹⁰⁰/₈₀ × ½ ]	75,000	45,000
Taxable pension		61,800

Case (c)

Computation of taxable pension of Mr. Amit

For the A.Y. 2023-24

Particulars	Rs	Rs
Uncommuted pension:
For the period 1.4.2022 to 31.7.2022 [Rs 3,000 × 4]	12,000
For the period 1.8.2022 to 31.3.2023 [Rs 3,000 × 20% × 8]	4,800	16,800
Commuted pension:
Received	1,20,000
Less: Exemption u/s 10(10A) (ii) [Rs 1,20,000 × ¹⁰⁰/₈₀ × ¹/₃ ]	50,000	70,000
Taxable pension		86,800

Illustration: 7

X, a resident of Ajmer, receives Rs 48,000 as basic salary during the previous year 2022-23. In addition, he gets Rs 4,800 as dearness allowance forming part of basic salary, 7% commission on sales made by him (sale made by X during the relevant previous year is Rs 86,000) and Rs 6,000 as house rent allowance. He, however, pays Rs 5,800 as house rent. Determine the quantum of exempted house rent allowance.

Solution: 7

Computation of taxable HRA of Mr. X

For the A.Y. 2023-24

Particulars	Rs	Rs
HRA received		6,000
Less: Exemption u/s 10(13A) – least of following three:
a) 40% (48,000 + 4,800 + 86,000 × 7%)	23,528
b) 5,800 − 10% (48,000 + 4,800 + 86,000 × 7%)	Nil
c) Actual HRA received	6,000	Nil
Taxable HRA		6,000

Exempted HRA u/s 10(13A) is nil.

Illustration: 8

Compute the taxable house rent allowance of Mr. Abhijeet from the following data:

a) Basic Salary Rs 5,000 p.m., D.A. Rs 2,000 p.m., HRA Rs 4,000 p.m., rent paid Rs 4,000 p.m. in Pune.

b) On 1/07/2022, there is an increment in Basic salary by Rs 1,000.

c) On 1/10/2022, employee hired a new flat in Kolkata at the same rent as he was posted to Kolkata.

d) On 1/01/2023, employee purchased his own flat and resides there.

Solution: 8

Computation of taxable HRA of Mr. Abhijeet

For the A.Y. 2023-24

	Apr- June 2022 (Pune) Rs	Jul- Sept 2022 (Pune) Rs	Oct- Dec 2022 (Kolkata) Rs	Jan- Mar 2023 (Kolkata) Rs
Salary p.m. [Basic + D.A.]	7,000	8,000	8,000	8,000
50% of salary	Nil	Nil	(a)4,000	(a)4,000
40% of salary	(a)2,800	(a)3,200	Nil	Nil
HRA p.m. received	(b)4,000	(b)4,000	(b)4,000	(b)4,000
Rent paid p.m.	4,000	4,000	4,000	Nil
Rent paid (−) 10% of salary	(c)3,300	(c)3,200	(c)3,200	(c)Nil
Amount exempt from tax u/s 10(13A) [least of (a), (b) and (c)]	(d)2,800	(d)3,200	(d)3,200	(d)Nil
Amount chargeable to tax [b – d]p.m.	1,200	800	800	4,000
Number of months	3	3	3	3
Total amount chargeable to tax	3,600	2,400	2,400	12,000

∴ Taxable HRA for the A.Y. 2023-24 = 3,600 + 2,400 + 2,400 + 12,000 = Rs 20,400

Illustration: 9

Mr. Mugal joined Star Ltd. on 1/4/2022. Details regarding his salary are as follows:

Particulars	Rs
Basic p.m.	5,000
Dearness allowance p.m. (50% considered for retirement benefit)	2,000
Education allowance p.m. (he has 1 son and 3 daughters)	1,000
Hostel allowance p.m. (none of the children is sent to hostel)	2,000
Medical allowance p.m. (total medical expenditure incurred Rs 3,000)	1,000
Transport allowance p.m. (being used for office to residence and vice versa)	1,800
Servant allowance p.m.	1,000
City compensatory allowance p.m.	2,000
Entertainment allowance p.m.	1,000
Assistants allowance p.m. (paid to assistant Rs 2,000 p.m.)	3,000
Professional development allowance p.m. (actual expenses for the same purpose Rs 8,000 p.m.)	2,000
Bonus p.a.	24,000
Commission p.a.	9,000
Fees p.a.	5,000

Compute his gross taxable salary for the assessment year 2023-24.

Solution: 9

Computation of Gross Taxable Salary of Mr. Mugal

For the A.Y. 2023-24

Particulars	Rs	Rs
Basic salary [5,000 × 12]		60,000
DA [2,000 × 12]		24,000
Bonus		24,000
Commission		9,000
Fees		5,000
Education allowance for four children [1,000 × 12]	12,000
LESS: Exemption (100 x 2 x 12)	2,400	9,600
Hostel expenditure allowance [2,000 × 12]	24,000
LESS: Exemption (300 x 2 x 12)	7,200	16,800
Medical allowance [Fully taxable] (1,000 × 12)		12,000
Transport allowance [Fully taxable (1,800 × 12)		21,600
Servant allowance [Fully taxable] (1,000 × 12)		12,000
City compensatory allowance [Fully taxable] (2,000 × 12)		24,000
Entertainment allowance (1,000 × 12)		12,000
Assistants allowance received (3,000 × 12)	36,000
Less Exemption u/s 10(14)(i) [2,000 × 12]	24,000	12,000
Professional development allowance received (2,000 × 12)	24,000
Less Exemption u/s 10(14) (i) [2,000 max. P.m. × 12]	24,000	Nil
Gross Taxable Salary		2,42,000

Illustration: 10

Miss Sonal, being a citizen of India and Government employee has following salary details:

Particulars	Rs
Basic salary p.m.	2,000
Dearness allowance p.m.	3,000
Dearness pay p.m.	1,000
Fees p.a.	50,000
House rent allowance p.m. (rent paid for Kolkata house Rs 4,000 p.m.)	5,000
Children education allowance p.m. (she is having one adopted child)	3,000
Children allowance p.m.	1,000
Hostel allowance p.m.	2,000
Dress allowance p.m. (Actual expenditure Rs 10,000 p.m.)	5,000
Uniform allowance p.m. (Actual expenditure Rs 1,000 p.m.)	2,000
Tiffin allowance p.m.	1,000
Education allowance for her own education p.m. (Actual expenditure Rs 1,500 p.m.)	2,000

Compute her gross salary for the assessment year 2023-24.

Solution: 10

Computation of Gross Taxable Salary of Miss Sonal

For the A.Y. 2023-24

Particulars	Rs	Rs	Rs
Basic salary [2,000 × 12]			24,000
Dearness allowance [3,000 × 12]			36,000
Dearness pay [1,000 × 12]			12,000
Fees			50,000
HRA
HRA received [5,000 × 12]		60,000
Less: Exemption u/s 10(13A) least of following three:
50% of (24,000 + 36,000 + 12,000)	36,000
4,000 × 12 − 10% of (24,000 + 36,000 + 12,000)	40,800
Actual HRA received	60,000	36,000	24,000
Children education allowance for one child [3,000 × 12]		36,000
LESS: Exemption (100 x 1 x 12)		1,200	34,800
Children allowance [1,000 × 12]			12,000
Hostel expenditure allowance [2,000 × 12]		24,000
LESS: Exemption (300 x 1 x 12)		3,600	20,400
Dress allowance [Fully taxable] (5,000 × 12)			60,000
Uniform allowance (2,000 × 12)		24,000
Less Exemption u/s 10(14)(i) [1,000 × 12]		12,000	12,000
Tiffin allowance [Fully taxable] (1,000 × 12)			12,000
Education allowance for the assessee’s own education		24,000
Less Exemption u/s 10(14)(i) [1,500 × 12]		18,000	6,000
Gross Taxable Salary			3,03,200

Illustration: 11

Mr. Chauhan has the following salary structure:

	Particulars	Rs
a)	Basic salary p.m.	5,000
b)	Entertainment allowance p.m.	1,000
c)	Education allowance p.m. (Chauhan has 3 children)	500
d)	DA p.m.	3,000
e)	Fees p.a.	5,000
f)	Bonus p.a.	10,000
g)	Professional tax of employee paid by employer p.a.	2,000

h) He has been provided a rent-free accommodation in Mumbai.

i) 60% of DA only forms part of retirement benefits.

Compute taxable value of accommodation in the hands of Mr. Chauhan in the following cases:

1) The employer owns such accommodation.

2) The employer hires such accommodation at a monthly rent of Rs 900.

Solution: 11

Computation of taxable value of rent-free accommodation

For the A.Y. 2023-24

Particulars	Rs	Rs
Basic salary [5,000 × 12]		60,000
Dearness allowance [3,000 × 12 × 60%]		21,600
Bonus		10,000
Fees		5,000
Entertainment allowance (1,000 × 12)		12,000
Education allowance [500 × 12]	6,000
LESS: Exemption [100 × 2 × 12]	2,400	3,600
Salary for the purpose of valuation of rent-free accommodation (A)		1,12,200

Value of accommodation (Case I):
15% of (A) [1,12,200 × 15%]		16,830

Value of accommodation (Case II):
Lower of following two:
(a) 15% of (A) [1,12,200 × 15%]	16,830
(b) Actual rent paid by the employer [900 × 12]	10,800	10,800

Illustration: 12

Mr. Chauhan has the following salary structure:

	Particulars	Rs
a)	Basic salary p.m.	5,000
b)	Entertainment allowance p.m.	1,000
c)	Education allowance p.m. (Chauhan has 3 children)	500
d)	DA p.m.	3,000
e)	Fees p.a.	5,000
f)	Bonus p.a.	10,000
g)	Professional tax of employee paid by employer p.a.	2,000

h) He has been provided a rent-free accommodation in a city where population is only 14, 60,000.

i) 60% of DA only forms part of retirement benefits.

Compute taxable value of accommodation in the hands of Mr. Chauhan in the following cases:

1) The employer owns such accommodation.

2) The employer hires such accommodation at a monthly rent of Rs 900.

Solution: 12

Computation of taxable value of rent-free accommodation

For the A.Y. 2023-24

Particulars	Rs	Rs
Basic salary [5,000 × 12]		60,000
Dearness allowance [3,000 × 12 × 60%]		21,600
Bonus		10,000
Fees		5,000
Entertainment allowance (1,000 × 12)		12,000
Education allowance [500 × 12]	6,000
LESS: Exemption [100 × 2 × 12]	2,400	3,600
Salary for the purpose of valuation of rent-free accommodation (A)		1,12,200

Value of accommodation (Case I):
10% of (A) [1,12,200 × 10%]		11,220

Value of accommodation (Case II):
Lower of following two:
(a) 15% of (A) [1,12,200 × 15%]	16,830
(b) Actual rent paid by the employer [900 × 12]	10,800	10,800

Illustration: 13

Miss Stuti has the following salary structure:

	Particulars	Rs
a)	Basic salary p.m.	15,000
b)	Dearness allowance (not forming part of retirement benefit) p.m.	5,000
c)	Hostel allowance (Stuti does not have any child) p.m.	1,000
d)	Tiffin allowance p.m.	500
e)	Transport allowance p.m.	200
f)	Bonus p.a.	20,000
g)	Commission p.a.	15,000
h)	Free refreshment in office p.a.	5,000
i)	Mobile phone facility by employer p.m.	900
j)	Computer facility by employer p.a.	10,000

She has been provided a Rent-free Accommodation (owned by employer) in Kolkata. The house was allotted to her with effect from 1/5/2022 but she could occupy the same only from 1/6/2022. Find her gross taxable salary.

Solution: 13

Computation of Gross Taxable Salary of Miss Stuti

For the A.Y. 2023-24

Particulars	Rs
Basic salary [15,000 × 12]	1,80,000
Dearness allowance [5,000 × 12]	60,000
Bonus	20,000
Commission	15,000
Hostel allowance [1,000 × 12]	12,000
Tiffin allowance [500 × 12]	6,000
Transport allowance [200 × 12]	2,400
Perquisite:
Free refreshment in the office	Nil
Free mobile phone facility	Nil
Free computer facility	Nil
Rent-free accommodation:
For the period 01.06.2022 – 31.03.2023:
(15% of Rs 2,35,400) × ¹⁰/₁₂	29,425
Gross Taxable Salary	3,24,825

Working:

Salary for the purpose of valuation of rent-free accommodation:	Rs
Basic salary [15,000 × 12]	1,80,000
Bonus	20,000
Commission	15,000
Hostel allowance	12,000
Tiffin allowance	6,000
Transport allowance	2,400
Total	2,35,400

Illustration: 14

Miss Khushi has the following salary details:

	Particulars	Rs
a)	Basic salary p.m.	6,000
b)	Dearness allowance p.m.	3,000
c)	Academic development allowance p.m.	1,000
d)	Entertainment allowance p.m.	500

She has been provided with a rent-free accommodation in Purulia. On 1/7/2022, she was posted to Kolkata. A new house further allotted to her on same date. But she surrendered her Purulia house only on 31/12/2022. Rent paid by employer for Purulia House Rs 500 p.m. while Kolkata house is owned by the employer. Find her gross taxable salary.

Solution: 14

Computation of Gross Taxable Salary of Miss Khushi

For the A.Y. 2023-24

Particulars	Rs	Rs	Rs
Basic salary [6,000 × 12]			72,000
Dearness allowance [3,000 × 12]			36,000
Academic development allowance (1,000 × 12)		12,000
Less: Exemption u/s 10(14) (i) (700 × 12)		8,400	3,600
Entertainment allowance (500 × 12)			6,000
Perquisite:
Rent-free accommodation:
A. For the period: 1.4.2022 – 30.6.2022:
Lower of following two for Purulia accommodation:
a) (15% of 1,17,600) × ³/₁₂	4,410
b) Rs 500 × 3	1,500	1,500
B. For the period: 1.7.2022 – 30.9.2022:
Lower of following two:
a) For Purulia accommodation	1,500
b) For Kolkata accommodation (15% of Rs 1,17,600) × ³/₁₂	4,410	1,500
C. For the period: 1.10.2022 – 31.12.2022:
For Purulia accommodation	1,500
Add: For Kolkata accommodation	4,410	5,910
D. For the period: 1.1.2023 – 31.3.2023:
For Kolkata accommodation		4,410	13,320
Gross Taxable Salary			1,30,920

Working:

Salary for the purpose of valuation of rent-free accommodation:	Rs
Basic salary [6,000 × 12]	72,000
Dearness allowance [3,000 × 12]	36,000
Taxable academic development allowance	3,600
Entertainment allowance (500 × 12)	6,000
Total	1,17,600

Illustration: 15

Sri Ashutosh has been provided with a furnished accommodation in a city having population of 14, 00,000 as per last census. Municipal Value of the house (owned by employer) is Rs 80,000 whereas Fair rent of the house is Rs 1, 00,000. His salary details are as under:

	Rs
Basic p.m.	25,000
Dearness allowance p.m.	5,000
Children education allowance p.m. (he has one son and two married daughters)	3,000

Furniture details as under:

Particulars	Hired by employer (Hire charge)	Owned by employer (Original cost)
T.V.	Rs 2,000 p.a.	–
Refrigerator	–	Rs 10,000
Washing machine	–	Rs 5,000
Other furniture	Rs 1,000 p.m.	Rs 20,000

Calculate gross taxable salary of Sri Ashutosh for the A.Y. 2023-24.

Solution: 15

Computation of Gross Taxable Salary of Sri Ashutosh

For the A.Y. 2023-24

Particulars	Rs	Rs	Rs
Basic salary [25,000 × 12]			3,00,000
Dearness allowance [5,000 × 12]			60,000
Children education allowance [3,000 × 12]		36,000
Less: Exemption u/s 10(14) (ii) [100 × 2 × 12]		2,400	33,600
Perquisite:
Rent-free furnished accommodation:
10% of salary [10% of 3,93,600]		39,360
Add: Value of furniture:
TV (hired)	2,000
Refrigerator (10,000 × 10%)	1,000
Washing machine (5,000 × 10%)	500
Other furniture (hired) (1,000 × 12)	12,000
Other furniture (owned) (20,000 × 10%)	2,000	17,500	56,860
Gross Taxable Salary			4,50,460

Working:

Salary for the purpose of valuation of rent-free accommodation:	Rs
Basic salary [25,000 × 12]	3,00,000
Dearness allowance [5,000 × 12]	60,000
Taxable children education allowance	33,600
Total	3,93,600

Illustration: 16

A company ‘X’ grants option to its employee ‘R’ on 1^st April, 2017 to apply for 100 shares of the company for making available right in the intellectual property to the employer-company at a pre-determined price of Rs 50 per share with date of vesting of the option being 1^st April, 2018 and exercise period being 1^st April, 2018 to 31^st March, 2023. Employee ‘R’ exercises his option on 31^st March, 2022 and shares are allotted/transferred to him on 3^rd April, 2022.

Fair market values of such share on different dates are as under:

Date	FMV (Rs)
01.04.2017	100
01.04.2018	180
31.03.2022	440
03.04.2022	470

Compute taxable perquisite, if any, in the hands of Mr. R for A.Y. 2023-24.

Solution: 16

Shares have been allotted / transferred to the employee on 3.4.2022 i.e. in the P.Y. 2022-23. Therefore, the perquisite (sweat equity shares) is taxable in the A.Y. 2023-24.

Taxable value of the perquisite

= Number of shares for which option to purchase has been exercised × (FMV per share on DEO – PDP per share)

= 100 × (440 – 50)

= Rs 39,000

Note:

1. DEO Þ Date of exercise

2. PDP Þ Pre-determined price

Illustration: 17

Sonam has been provided a car (1.7 ltr.) by his employer Vikash Ltd. The cost of car to the employer was Rs 3,50,000 and maintenance cost incurred by the employer Rs 30,000 p.a. Chauffeur salary paid by the employer Rs 3,000 p.m. Find value of perquisite for Sonam for the A.Y.2023-24, if the car is used for:

a) Office purpose. b) Personal purpose. c) Both purposes.

In case (b) and (c), employee is being charged Rs 15,000 p.a. for such facility.

Solution: 17

a) Official use

Value of the perquisite is nil assuming that a Log Book was maintained and certified by an appropriate officer of the employer / company.

b) Private use

1) Car (1.7 ltr.) is owned by the employer, and

2) R/M expenses are incurred by the employer.

Computation of Taxable value of the perquisite

For the A.Y. 2023-24

Particulars	Rs
10% of cost of the car (Rs 3, 50,000 × 10%)	35,000
Add: Salary of chauffeur paid by employer (Rs 3,000 × 12)	36,000
Add: R/M expenses incurred by employer	30,000
	1,01,000
Less: Amount recovered from the employee (assessee)	(15,000)
Taxable value of the perquisite	86,000

c) Partly official and partly private use

i) Car is owned by the employer, and

ii) R/M expenses are incurred by the employer.

Taxable value of perquisite

= (2,400 + 900) × 12 = Rs 39,600

Note:

Amount recovered from the employee (assessee) is not to be deducted in this case.

Illustration: 18

Mr. Piyush has been provided a car (1.5 ltr.) on 15/7/2022. The cost of car to the employer was Rs 6,00,000 and maintenance cost incurred by employer Rs 20,000 p.a. Chauffeur salary paid by employer (Mr. Ratan) Rs 4,000 p.m. The car is 40% used for office and 60% for personal purpose. Charges paid by employee for such facility ₹ 5,000 p.a. Find taxable value of perquisite.

Solution: 18

1) Car (1.5 ltr.) is owned by the employer,

2) R/M expenses are incurred by the employer, and

3) The car is used partly for official and partly for private purpose. (No Log Book is maintained)

Taxable value of perquisite

= (1,800 + 900) × 8 = Rs 21,600

Note:

1. Part of the month is not to be taken into consideration.

2. Amount recovered from the employee (assessee) is not to be deducted in this case.

Illustration: 19

Mr. Vikram being a Government employee has a car (1.7 ltr.) used for office as well as for personal purpose. During the year, he incurred Rs 40,000 on maintenance and Rs 20,000 on driver’s salary. The entire cost is reimbursed by employer. Find taxable perquisite.

Solution: 19

1) Car (1.7 ltr.) is owned by the employee,

2) R/M expenses are reimbursed by the employer,

3) Driver’s salary is reimbursed by the employer, and

4) The car is used partly for official and partly for private purpose.

Computation of Taxable value of the perquisite

For the A.Y. 2023-24

Particulars	Rs
Actual R/M expenses reimbursed by employer	40,000
Add: Driver’s salary reimbursed by employer	20,000
	60,000
Less: (2,400 + 900) × 12	(39,600)
Taxable value of the perquisite	20,400

Illustration: 20

Wasim has a car (1.5 ltr.) used for office as well as for personal purpose. During the year car is used 80% for business purpose being certified by the employer. During the year, he incurred Rs 50,000 on maintenance and running of such car. The entire cost is reimbursed by the employer. Find taxable perquisite if –

1) A proper log book is maintained;

2) A proper log book is not maintained

Solution: 20

1) Car (1.5 ltr.) is owned by the employee,

2) R/M expenses are reimbursed by the employer, and

3) The car is used partly for official and partly for private purpose.

IF NO LOG BOOK IS MAINTAINED

Computation of Taxable value of the perquisite

For the A.Y. 2023-24

Particulars	Rs
Actual R/M expenses reimbursed by employer	50,000
Less: (1,800 + 900) × 12	(32,400)
Taxable value of the perquisite	17,600

IF LOG BOOK IS MAINTAINED

Taxable value of perquisite

= Actual R/M expenses reimbursed by the employer for employee’s private use

= Rs 50,000 × 20%

= Rs 10,000

Illustration: 21

Amit is provided with two cars (engine capacity does not exceed 1.6 ltr.), to be used for official & personal work, by his employer Raj. From the following information available from the employer records compute taxable value of the perquisite (assume car 1 is exclusively used by Amit for private purpose).

Particulars	Car 1 (Rs)	Car 2 (Rs)
Cost of the car	6,00,000	4,00,000
Running and maintenance (borne by the company)	40,800	28,000
Salary of driver (borne by the company)	24,000	24,000

Solution: 21

1) Both the cars are owned by the employer,

2) R/M expenses for both the cars are incurred by the employer, and

3) Drivers’ salaries of the cars are paid by the employer.

Computation of Taxable value of the perquisite (free car) For the A.Y. 2023-24

Particulars	Rs	Rs
Car: 1 (Used by employee for private purpose)
10% of cost of the car (Rs 6, 00,000 × 10%)	60,000
Add: R/M expenses incurred by the employer	40,800
Add: Driver’s salary paid by the employer	24,000	1,24,800
Car: 2 (Used by employee for both official and private purpose)
(1,800 + 900) × 12		32,400
Taxable value of the perquisite		1,57,200

Illustration: 22

Mr. Vijay, manager, has been provided the following car facilities by Kishan Ltd. (his employer):

Particulars	Car A	Car B	Car C
Owned by	Employer	Employer	Employer
Purpose used for	Office + Personal		Personal
Cost of car	3,00,000	5,00,000	2,00,000
Maintenance expenditure incurred by employer	50,000	60,000	-
Maintenance expenditure incurred by employee	-	-	40,000
Capacity of car	1.8 ltr.	1.4 ltr.	1.6 ltr.

Find taxable value of car facility in the following cases:

Case a) Mr. Vijay holds 17% of equity share capital and 30% of preference share capital of Kishan Ltd. and his wife holds 13% equity share capital of the same company. Assume his total salary during the year other than perquisite is ₹ 40,000;

Case b) Mr. Vijay holds 25% equity share capital of the employer company.

Solution: 22

Case a)

Mr. Vijay is a non-specified employee and therefore, the car facility given to him by his employer Kishan Ltd. shall not be taxable.

Case b)

Mr. Vijay is a specified employee in this case and therefore, the car facility given to him by his employer Kishan Ltd. shall be treated as a perquisite and shall be taxable accordingly as follows:

As Mr. Vijay has been provided with three cars by his employer and two out of these three cars have been used for official as well as personal purpose and the third car has been used for personal purpose, as per the provisions of the Income Tax Act, he will have to opt for and declare one car as has been used for both official and personal purpose, the other two cars being used for personal purpose only.

Particulars	Rs
Car A (If used for private purpose)
10% of cost of the car (Rs 3, 00,000 × 10%)	30,000
Add: R/M expenses incurred by the employer	50,000
Taxable value of the perquisite	80,000
Car A (If used for both official and private purpose)
Taxable value of the perquisite (2,400 × 12)	28,800

Particulars	Rs
Car B (If used for private purpose)
10% of cost of the car (Rs 5, 00,000 × 10%)	50,000
Add: R/M expenses incurred by the employer	60,000
Taxable value of the perquisite	1,10,000
Car B (If used for both official and private purpose)
Taxable value of the perquisite (1,800 × 12)	21,600

Particulars	Rs
Car C (Used for private purpose)
10% of cost of the car (Rs 2, 00,000 × 10%)	20,000
Add: R/M expenses incurred by the employer	Nil
Taxable value of the perquisite	20,000

Car	Option 1		Option 2
	Type of use	Rs	Type of use	Rs
A	Official + Private	28,800	Private	80,000
B	Private	1,10,000	Official + Private	21,600
C	Private	20,000	Private	20,000
		1,58,800		1,21,600

Mr. Vijay should choose the Option 2 because taxable value of perquisite under Option 2 (Rs 1, 21,600) is less than that under Option 1 (Rs 1, 58,800). This means, Mr. Vijay should declare Car B as has been used by him partly for official and partly for private purpose and accordingly the taxable value of the perquisite of car facility will be Rs 1, 21,600.

Illustration: 23

X Ltd. has sold the following assets to its employee, Mr. Amit. Compute taxable perquisite.

Assets	Dt. of purchase	Purchase value	Dt. of sale	Sale price
Computer	1.7.2019	2,00,000	18.8.2022	20,000
Car	1.4.2020	3,00,000	1.3.2023	50,000
Television	1.4.2017	50,000	1.4.2022	2,000
Sofa set	1.4.2007	80,000	1.7.2022	5,000

Solution: 23

Computation of taxable value of perquisite in the hands of Mr. Amit for the assessment year 2023-24

Particulars	Rs	Rs
Computer:
Sale value	20,000
Written-Down-Value (WDV) [Rs 2,00,000 × 50% × 50% × 50%]	25,000
Perquisite [WDV – Sale value]		5,000
Car:
Sale value	50,000
Written-Down-Value (WDV) [Rs 3,00,000 × 80% × 80%]	1,92,000
Perquisite [WDV – Sale value]		1,42,000
Television:
Sale value	2,000
Written-Down-Value (WDV) [Rs 50,000 – (50,000 × 10% × 5)]	25,000
Perquisite [WDV – Sale value]		23,000
Sofa set:
Sale value	5,000
Written-Down-Value (WDV) [Fully depreciated @ 10% p.a. under SLM because the asset was used for more than 10 years before getting sold]	Nil
Perquisite [WDV – Sale value] (Perquisite cannot be negative)		Nil
Taxable perquisite for A.Y. 2023-24		1,70,000

Illustration: 24

Himalaya Ltd. reimburses the following expenditure on medical treatment of the son of an employee Karan.

The treatment was done at UK:

1. Travelling expenses Rs 1, 15,000.

2. Stay expenses at UK permitted by RBI Rs 45,000 (Actual expenses Rs 70,000).

3. Medical expenses permitted by RBI Rs 50,000 (Actual expenses Rs 70,000).

Compute the taxable perquisites for the assessment year 2023-24 in the hands of Karan, if his annual income from salary before considering medical facility perquisite was (i) Rs 1,50,000; (ii) Rs 2,00,000.

Solution: 24

Case: 1

Computation of taxable value of perquisite in the hands of Mr. Karan for the assessment year 2023-24

Particulars	Rs	Rs
Medical expenses:
Actual expenses reimbursed	70,000
LESS: Amount permitted by RBI	50,000
Perquisite [Rs 70,000 – 50,000]		20,000
Stay expenses:
Actual expenses reimbursed	70,000
LESS: Amount permitted by RBI	45,000
Perquisite [Rs 70,000 – 45,000]		25,000
Travelling expenses:
Perquisite (GTI before including therein this travelling expenses = Rs 1,50,000 + 20,000 + 25,000 = Rs 1,95,000 does not exceed Rs 2,00,000)		Exempted
Taxable perquisite for A.Y. 2023-24		45,000

Case: 2

Computation of taxable value of perquisite in the hands of Mr. Karan for the assessment year 2023-24

Particulars	Rs	Rs
Medical expenses:
Actual expenses reimbursed	70,000
LESS: Amount permitted by RBI	50,000
Perquisite [Rs 70,000 – 50,000]		20,000
Stay expenses:
Actual expenses reimbursed	70,000
LESS: Amount permitted by RBI	45,000
Perquisite [Rs 70,000 – 45,000]		25,000
Travelling expenses:
Perquisite (GTI before including therein this travelling expenses = Rs 2,00,000 + 20,000 + 25,000 = Rs 2,45,000 exceeds Rs 2,00,000) Actual expenses reimbursed		1,15,000
Taxable perquisite for A.Y. 2023-24		1,60,000

Illustration: 25

Mr. X has the following salary structure –

Basic pay p.m.	Rs 10,000
Commission (fixed)	Rs 2,000
DA p.m.	Rs 1,000
Entertainment allowance p.m.	Rs 2,000

X contributes Rs 20,000 to provident fund. Employer also makes a matching contribution. Compute gross salary of Mr. X if –

a) Mr. X is a Government employee and such provident fund is a statutory provident fund.

b) Mr. X is an employee of Y Ltd. and such fund is a recognized fund.

c) Mr. X is an employee of Z Ltd. and such fund is an unrecognized fund.

Solution: 25

Computation of Gross Salary of Mr. X

For the assessment year 2023-24

*Particulars*	*SPF (Rs)*	*RPF(Rs)*	*URPF(Rs)*
Basic salary (Rs 10,000 × 12)	1,20,000	1,20,000	1,20,000
Dearness allowance (Rs 1,000 × 12)	12,000	12,000	12,000
Commission (Fixed)	2,000	2,000	2,000
Employer’s contribution to RPF [Rs 20,000 – 12% of (Rs 1,20,000 + Rs 12,000)]	-	4,160	-
Entertainment allowance (Rs 2,000 × 12)	24,000	24,000	24,000
GROSS SALARY	1,58,000	1,62,160	1,58,000

Illustration: 26

Mr. Sharma has been appointed as an accountant of ABC Ltd as on 1/4/2020, since then he is working with the same company. The salary structure and increment details are as under:

Basic Rs 5000 - 1000 - 8000 -1500 - 14000

D.A. Rs 3000 – 500 – 5000 – 1000 - 10000

He and his employer contribute to URPF 14% of basic and DA. Every year 9% interest is credited to such fund. As on 1/4/2022, the fund gets recognition. Hence, the accumulated balance in URPF was transferred to RPF. Comment on tax treatment of such transferred balance.

Solution: 26

Taxable employer’s contribution to RPF

For A.Y. 2023-24

*Particulars*	*Basic (Rs)*	*D.A. (Rs)*	*Total (Rs)*
For P.Y. 2020-21 (A.Y. 2021-2022)
Basic (5,000 × 12)	60,000
D.A. (3,000 × 12)		36,000
For P.Y. 2021-22 (A.Y. 2022-2023)
Basic (6,000 × 12)	72,000
D.A. (3,500 × 12)		42,000
Total	1,32,000	78,000	2,10,000
Contribution to URPF by employer (2, 10,000 × 14%)			29,400
Exemption when converted into RPF in P.Y 2022- 23 (2, 10,000 × 12%)			25,200
Taxable employer’s contribution to URPF converted to RPF in the A.Y. 2023-24			4,200
Taxable employer’s contribution to RPF for A.Y. 2023-24 [(84,000 + 48,000) × 2%]			2,640
Taxable employer’s contribution to RPF for A.Y. 2023-24			6,840

Illustration: 27

Compute taxable Entertainment allowance & net salary of Sri Hanuman Prasad from the following data:

Basic salary p.m.	Rs 8,000
DA p.m.	Rs 2,000
Taxable perquisite	Rs 35,000
Entertainment allowance p.m.	Rs 4,000

Out of total entertainment allowance Rs 20,000 is expended and balance amount is saved. Assume Sri Hanuman Prasad is:

1) Government employee;

2) Non-Government employee.

Solution: 27

Taxable Salary of Sri Hanuman Prasad

For A.Y. 2023-24

When Government Employee:

Particulars	Rs	Rs	Rs
Basic salary [Rs 8,000 × 12]			96,000
DA [Rs 2,000 × 12]			24,000
Entertainment allowance [Rs 4,000 × 12]			48,000
Taxable perquisites			35,000
Gross Salary			2,03,000
LESS: Deduction
u/s 16(ia) – Standard deduction		50,000
u/s 16(ii) – Entertainment allowance – Least of following three: 1. Rs 5,000 2. 20% of RS 96,000 3. Actual allowance received	5,000 19,200 48,000	5,000	(55,000)
Taxable Salary			1,48,000

Taxable Salary of Sri Hanuman Prasad

For A.Y. 2023-24

When Non-Government Employee:

Particulars	Rs	Rs	Rs
Basic salary [Rs 8,000 × 12]			96,000
DA [Rs 2,000 × 12]			24,000
Entertainment allowance [Rs 4,000 × 12]			48,000
Taxable perquisites			35,000
Gross Salary			2,03,000
LESS: Deduction
U/s 16(ia) – Stand. deduction		50,000
u/s 16(ii) –		Nil	(50,000)
Taxable Salary			1,53,000

Illustration: 28

Mr. Rohit a non-Government employee has the following salary details:

1) Basic Salary Rs 5,000 p.m.

2) D.A. Rs 2,000 p.m.

3) Entertainment Allowance Rs 300 p.m.

4) Professional tax paid by employee Rs 600.

5) LIC Premium paid by employer Rs 3,600.

6) Income tax paid by employee Rs 2,000.

7) Professional tax paid by employer on behalf of employee Rs 1,600.

Find his taxable salary.

Solution: 28

Taxable Salary of Mr. Rohit

For A.Y. 2023-24

Particulars	Rs	Rs	Rs
Basic salary [Rs 5,000 × 12]			60,000
DA [Rs 2,000 × 12]			24,000
Entertainment allowance [Rs 300 × 12]			3,600
Perquisites:
LIC Prem. paid by employer			3,600
Prof tax paid by employer			1,600
Gross Salary			92,800
LESS: Deduction
u/s 16 (ia) – Standard deduction		50,000
u/s 16 (ii) – Entertainment Allowance		Nil
u/s 16 (iii) – Professional tax (Rs 600 + 1,600)		2,200	(52,200)
Taxable Salary			40,600

Illustration: 29

Mr. Bharat of Siliguri is offered an employment by Vimal and Co. Ltd., Kolkata on a basic salary of Rs 5,500 p.m. Other allowances are dearness allowance (not forming part of salary for retirement benefits) Rs 4,000 p.m., medical allowance Rs 1,000 p.m. and bonus being 1 month’s basic salary. The company gives an option to him either to take a rent-free accommodation in Kolkata of the fair rental value of Rs 1,000 p.m. or to accept a cash house rent allowance of Rs 1,000 p.m. He decides to accept house rent allowance and takes a house in Kolkata at a monthly rent of Rs 1,000.

Do you think he has made a wise choice from tax advantage point of view? State the reasons.

Solution: 29

Taxable Salary of Mr. Bharat

For A.Y. 2023-24

Option HRA:

Particulars	Rs	Rs	Rs
Basic salary [Rs 5,500 × 12]			66,000
Bonus			5,500
DA [Rs 4,000 × 12]			48,000
Medical allowance [Rs 1,000 × 12]			12,000
HRA:
HRA received [Rs 1,000 × 12]		12,000
LESS: Exemption u/s 10(13A) Least of following three:
1. 50% × (Rs 66,000)	33,000
2. (Rs 1,000 × 12) – [10% × (Rs 66,000)]	5,400
3. Actual HRA received	12,000	(5,400)	6,600
Gross Salary			1,38,100

Taxable Salary of Mr. Bharat

For A.Y. 2023-24

Option RFA:

Particulars	Rs	Rs	Rs
Basic salary [Rs 5,500 × 12]			66,000
Bonus			5,500
DA [Rs 4,000 × 12]			48,000
Medical allowance [Rs 1,000 × 12]			12,000
RFA:
15% × (Rs 66,000 + 5,500 + 12,000)			12,525
Gross Salary			1,44,025

Gross salary is less when Mr. Bharat takes HRA than that when he takes Rent Free Accommodation. Therefore, he has taken the right decision.

Illustration: 30

Following are the particulars of income of Mrs. S. Choudhury for the previous year 2022-23:

a. Basic salary @ Rs 15,000 p.m.

b. Dearness allowance @ 60% of salary.

c. Medical allowance @ Rs 600 p.m. (actual expenditure Rs 5,000).

d. House rent allowance received @ Rs 6,000 p.m. and she pays rent of Rs 7,200 p.m. for her house in Durgapur.

e. City compensatory allowance Rs 1,500 p.m.

f. She owns a car which she is using for official purposes. Her employer reimburses her @ Rs 3,000 p.m.

g. She is contributing Rs 2,100 p.m. towards a Recognised Provident Fund. The employer is also contributing the same amount. Interest credited to the Fund @ 11% is Rs 2,200.

h. She paid Rs 1,800 as professional tax during the year.

Compute income from salary of Mrs. Choudhury for the assessment year 2023-24.

Solution: 30

Taxable Salary of Mrs. S. Choudhury

For A.Y. 2023-24

Particulars	Rs	Rs	Rs
Basic salary [Rs 15,000 × 12]			1,80,000
DA [Rs 1,80,000 × 60%]			1,08,000
Medical allowance [Rs 600 × 12]			7,200
City compensatory allowance [Rs 1,500 × 12]			18,000
HRA:
HRA received [Rs 6,000 × 12]		72,000
LESS: Exemption u/s 10(13A) Least of following three:
1. 40% × (Rs 2,88,000)	1,15,200
2. (Rs 7,200 × 12) – [10% × (Rs 2,88,000)]	57,600
3. Actual HRA received	72,000	(57,600)	14,400
Car facility			Nil
Employer’s contribution to RPF [Rs 2,100 × 12]		25,200
LESS: Exemption [Rs 2,88,000 × 12%]		(25,200)	Nil
Interest on RPF received		2,200
LESS: Exemption [Rs 2,200 × 9.5/11]		(1,900)	300
Gross Salary			3,27,900
LESS: Deduction
u/s 16 (ia) – Standard deduction		50,000
u/s 16 (ii) – Entertainment allowance		1,800	(51,800)
Taxable Salary			2,76,100

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Sunday, February 04, 2024

Direct Taxation - Income From Salary

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