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CHAPTER
HEADS OF INCOME
UNIT – 1 : SALARIES
LEARNING OUTCOMES
After studying this unit, you would be able to -
♦ ascertain the point of time when salary income is chargeable to tax;
♦ comprehend the meaning of salary, profits in lieu of salary, allowances,
perquisite and various retirement benefits;
♦ identify the allowances which are exempt and perquisites which are
tax free under default tax regime under section 115BAC and under the
optional tax regime (i.e., the normal provisions of the Act);
♦ determine the taxable portion of retirement benefits, allowances and
other benefits which form part of salary;
♦ determine the value of perquisite chargeable to tax under the head
“Salaries”;
♦ identify the admissible deductions from salary under the default tax
regime under section 115BAC;
♦ identify the admissible deductions from salary under the optional tax
regime (i.e., the normal provisions of the Act)
♦ compute the income chargeable to tax under the head “Salaries” under
both the default tax regime and the optional tax regime.
© The Institute of Chartered Accountants of India

3.2 INCOME TAX LAW
Proforma for computation of income under the head “Salaries” as per

default tax regime under section 115BAC
Particulars Amt
(`)
(i) Basic Salary xxx
(ii) Fees/Commission xxx
(iii) Bonus xxx
(iv) Allowances:
(a) Dearness Allowance [Fully taxable] xxx
(b) House Rent Allowance (HRA) [Fully taxable] xxx
(c) Children Education Allowance [Fully taxable] xxx
(d) Children Hostel Allowance [Fully taxable] xxx
(e) Transport allowance xxx
Less: ` 3,200 per month only in case of blind/
deaf and dumb/orthopedically handicapped
employee xxx xxx
(f) Entertainment Allowance [Fully taxable] xxx
(g) Travelling Allowance/Daily Allowance/ xxx
Conveyance Allowance
Less: Exempt if the amount is fully utilised for the
purpose xxx xxx
(h) Other Allowances including overtime allowance, city xxx
compensatory allowance etc. [Fully taxable]
(v) Taxable Perquisites
(a) Value of rent-free accommodation provided to the xxx
employee */ Value of any accommodation provided to
the employee at a concessional rate*
I) Where the accommodation is provided by the Govt.
to its employees
License fee determined by the Govt. xxx
Less: Rent actually paid by the employer xxx
*
In case of furnished accommodation, the value will be increased by 10% p.a. of the cost of furniture or
hire charges, as the case may be, less amount recovered from the employees.

SALARIES 3.3
II) Where the accommodation is provided by any

other employer
If accommodation is owned by the employer
(i) Cities having population > 40 lakh as per
2011 census
10% of salary in respect of the period of
occupation (–) rent recovered from employee xxx
(ii) Cities having population > 15 lakh ≤ 40
lakh as per 2011 census
7.5% of salary in respect of the period of
(iii) In other cities
If accommodation is taken on lease/rent by the employer
Lower of lease rental paid or payable by the xxx
employer (or) 10% of salary
Less: Rent recovered from the employee xxx
(b) Obligation of employee discharged by employer: For xxx
e.g., Professional tax paid by the employer
(c) Any sum payable by the employer to effect an xxx
assurance on the life of the employee or to effect a
contract for annuity: Actual expenditure incurred by the
employer
(d) Amount or aggregate of amounts of any contribution made xxx
- in a recognised provident fund,
- in NPS referred to in section 80CCD(1)
- in an approved superannuation fund
by the employer to the account of the assessee, to the
extent it exceeds ` 7,50,000 in a P.Y.
(e) Annual accretion by way of interest, dividend or any xxx
other amount of similar nature during the P.Y. to the
balance at the credit of the recognized provident fund or
NPS or approved superannuation fund to the extent it
relates to the employer’s contribution which is included
in total income in any P.Y. under section 17(2)(vii)

3.4 INCOME TAX LAW
(f) Value of use of motor car [Refer Table below] xxx

(g) Any other perquisite: For example, xxx
(1) Provision of services of a sweeper, gardener,
watchman or personal attendant: Actual cost to
employer by way of salary paid or payable for such
services (-) amount paid by the employee
(2) Gas, electricity, or water supplied by employer for
household consumption of the employee: Amount
paid on that account by the employer to the agency
supplying gas etc. (-) amount paid by the employee
(3) Provision of free or concessional education facilities
for any member of employee’s household: Sum equal
to the expenditure incurred by the employer (-) amount
paid or recovered from the employee
Where educational institution is maintained and
owned by employer: Cost of such education in
similar institution in or near the locality (-) amount
paid or recovered from employee [However, there
would be no perquisite if the value of benefit per
child does not exceed ` 1,000 p.m.]
Note: Above perquisites in (f) and (g) are taxable only in
case of specified employees.
(4) Interest-free or concessional loan exceeding
` 20,000: Interest computed at the rate charged by SBI
as on 1st day of relevant P.Y. in respect of loans for similar
purposes on the maximum outstanding monthly balance
(-) interest actually paid by employee
(5) Free food and non-alcoholic beverages through
paid vouchers
(6) Value of gift, voucher: Sum equal to the amount of
such gift [If value of gift, voucher is below
` 5,000, there would be no perquisite]
(7) Use of moveable assets [Refer table at page 3.88]
(8) Transfer of moveable assets: Actual cost of asset to
employer – cost of normal wear and tear – Amount paid or
recovered from employee [Refer table at page 3.88]
(vi) Leave travel concession [Fully taxable] xxx

SALARIES 3.5
(vii) Gratuity
(a) Received during the tenure of employment (fully taxable) xxx
(b) Received at the time of retirement or otherwise xxx
Less: Exempt u/s 10(10) [Refer fig at Page 3.32] xxx xxx
(viii) Uncommuted pension [fully taxable] xxx
(ix) Commuted pension xxx
Less: Exempt u/s 10(10A) [Refer fig at Page 3.29] xxx xxx
(x) Leave encashment
(a) Received during the employment [fully taxable] xxx
Less: Exempt u/s 10(10AA) [Refer fig at Page 3.36] xxx xxx
(xi) Voluntary retirement compensation xxx
Less: Exempt u/s 10(10C) - Least of the following: xxx xxx
(a) Compensation received/receivable on xxx
voluntary retirement
(b) ` 5,00,000 xxx
(c) 3 months’ salary x completed years of
service xxx
(d) Last drawn salary x remaining months of
service left xxx
(xii) Retrenchment compensation etc. xxx
Less: Exempt u/s 10(10B)] – Least of the following: xxx xxx
(a) Compensation actually received xxx
(b) ` 5,00,000 xxx
(c) 15 days average pay x completed years of
service and part thereof in excess of 6
months xxx
Gross Salary xxx
Less: Deduction under section 16
Standard deduction u/s 16(ia) - amount of salary or xxx
` 75,000, whichever is less
Income under the head “Salaries” xxx

3.6 INCOME TAX LAW
Proforma for computation of income under the head “Salaries” under the
optional tax regime (i.e., the normal provisions of the Act)
Particulars Amt
(`)
(i) Basic Salary xxx
(ii) Fees/Commission xxx
(iii) Bonus xxx
(iv) Allowances:
(a) Dearness Allowance [Fully taxable] xxx
(b) House Rent Allowance (HRA) xxx
Less: Least of the following is exempt [Section
10(13A)] xxx xxx
(i) HRA actually received xxx
(ii) Rent paid (-)10% of salary for the
relevant period xxx
(iii) 50% of salary, if accommodation is
located in Mumbai, Kolkata, Delhi or
Chennai or 40% of salary in any other
city for the relevant period xxx
(c) Children Education Allowance xxx
Less: Exempt upto ` 100 per month per child upto
maximum of two children xxx xxx
(d) Children Hostel Allowance xxx
Less: Exempt upto ` 300 per month per child upto
maximum of two children xxx xxx
(e) Transport allowance xxx
Less: ` 3,200 per month only in case of blind/ deaf
and dumb/ orthopedically handicapped employee xxx xxx
(f) Entertainment Allowance xxx
(g) Travelling Allowance/ Daily Allowance/ xxx
Conveyance Allowance
Less: Exempt if the amount is fully utilised for the
purpose xxx xxx
(h) Other Allowances including overtime allowance, city xxx
compensatory allowance etc.

SALARIES 3.7
(v) Taxable Perquisites

(a) Value of rent free accommodation provided to the xxx
employee †/ Value of any accommodation provided to
the employee at a concessional rate†
I) Where the accommodation is provided by the Govt.
to its employees
License fee determined by the Govt. xxx
Less: Rent actually paid by the employer xxx
II) Where the accommodation is provided by any
other employer
If accommodation is owned by the employer
(i) Cities having population > 40 lakh as per
2011 census
(ii) Cities having population > 15 lakh ≤ 40
lakh as per 2011 census
7.5% of salary in respect of the period of
(iii) In other cities
If accommodation is taken on lease/rent by the employer
Lower of lease rental paid or payable by the xxx
employer (or) 10% of salary
Less: Rent recovered from the employee xxx
(b) Obligation of employee discharged by employer: For xxx
e.g., Professional tax paid by the employer
(c) Any sum payable by the employer to effect an assurance xxx
on the life of the employee or to effect a contract for
annuity: Actual expenditure incurred by the employer
(d) Amount or aggregate of amounts of any contribution xxx
made –
- in a recognised provident fund,
†
In case of furnished accommodation, the value will be increased by 10% p.a. of the cost of furniture or
hire charges, as the case may be, less amount recovered from the employees.

3.8 INCOME TAX LAW
- in NPS referred to in section 80CCD(1)

- in an approved superannuation fund
by the employer to the account of the assessee, to the
extent it exceeds ` 7,50,000
(e) Annual accretion by way of interest, dividend or any xxx
other amount of similar nature during the P.Y. to the
balance at the credit of the recognized provident fund or
NPS or approved superannuation fund to the extent it
relates to the employer’s contribution which is included
in total income in any P.Y. under section 17(2)(vii)
(f) Value of use of motor car [Refer Table below] xxx
(g) Any other perquisite: For example, xxx
(1) Provision of services of a sweeper, gardener,
watchman or personal attendant: Actual cost to
employer by way of salary paid or payable for such
services (-) amount paid by the employee
(2) Gas, electricity, or water supplied by employer for
household consumption of the employee: Amount
paid on that account by the employer to the agency
supplying gas etc. (-) amount paid by the employee
(3) Provision of free or concessional education facilities
for any member of employee’s household: Sum equal
to the expenditure incurred by the employer (-) amount
paid or recovered from the employee
Where educational institution is maintained and
owned by employer: Cost of such education in
similar institution in or near the locality (-) amount
paid or recovered from employee [However, there
would be no perquisite if the value of benefit per
child does not exceed ` 1,000 p.m.]
Note: Above perquisites in (f) and (g) are taxable only in
case of specified employees.
(4) Interest-free or concessional loan exceeding
` 20,000: Interest computed at the rate charged by
SBI as on 1st day of relevant P.Y. in respect of loans
for similar purposes on the maximum outstanding
monthly balance (-) interest actually paid by
employee

SALARIES 3.9
(5) Free food and non-alcoholic beverages: Expenses

incurred by employer (-) amount recovered from
employee [Free food and non-alcoholic beverages
provided during office hours or paid vouchers upto
` 50 per meal is exempt]
(6) Value of gift, voucher: Sum equal to the amount of
such gift [If value of gift, voucher is below
` 5,000, there would be no perquisite]
(7) Use of moveable assets [Refer table at page 3.88]
(8) Transfer of moveable assets: Actual cost of asset to
employer – cost of normal wear and tear – Amount paid or
recovered from employee [Refer table at page 3.88]
(vi) Leave travel concession xxx
Less: Exempt u/s 10(5) [Refer table at Page 3.63] xxx xxx
(vii) Gratuity
(a) Received during the tenure of employment [fully taxable] xxx
Less: Exempt u/s 10(10) [Refer fig at Page 3.32] xxx xxx
(viii) Uncommuted pension [fully taxable] xxx
(ix) Commuted pension xxx
Less: Exempt u/s 10(10A) [Refer fig at Page 3.29] xxx xxx
(x) Leave encashment
(a) Received during the employment (fully taxable) xxx
Less: Exempt u/s 10(10AA) [Refer fig at Page 3.36] xxx xxx
(xi) Voluntary retirement compensation xxx
Less: Exempt u/s 10(10C) - Least of the following: xxx xxx
(a) Compensation received/receivable on
voluntary retirement xxx
(b) ` 5,00,000 xxx
(c) 3 months’ salary x completed years of service xxx
(d) Last drawn salary x remaining months of
service left xxx

3.10 INCOME TAX LAW
(xii) Retrenchment compensation etc. xxx

Less: Exempt u/s 10(10B)] – Least of the following: xxx xxx
(a) Compensation actually received xxx
(b) ` 5,00,000 xxx
(c) 15 days average pay x completed years of
service and part thereof in excess of 6 months xxx
Gross Salary xxx
Standard deduction u/s 16(ia) - amount of salary or xxx
` 50,000, whichever is less
Entertainment allowance u/s 16(ii) (only for Govt. xxx
employees)
Least of the following is allowable as deduction: xxx xxx
(a) ` 5,000 xxx
(b) 1/5 of basic salary
th
xxx
(c) Actual entertainment allowance received xxx
Professional Tax/Tax on employment (paid by xxx
employer/ employee) u/s 16(iii)
Income under the head “Salaries” xxx
Proforma for computation of income under the head “Salaries” under

optional tax regime taking Salaries computed as per default tax regime
under section 115BAC as the starting point
Particulars Amt
(`)
Income under the head “Salaries” under default tax regime under xxx
section 115BAC
Add: Deduction under section 16
Difference between standard deduction claimed under default tax xxx
regime i.e., lower of gross salary or ` 75,000 and standard deduction
available under optional tax regime i.e., lower of gross salary or
` 50,000
Less: HRA exempt under section 10(13A) – Least of the three limits xxx
Children Education Allowance (Upto ` 100 per month per child xxx
upto maximum of two children)

SALARIES 3.11
Children Hostel Allowance (Upto ` 300 per month per child xxx
upto maximum of two children)
Free food and non-alcoholic beverages through paid vouchers xxx
upto ` 50 per meal
Leave travel concession exempt u/s 10(5) xxx
xxx
Entertainment allowance u/s 16(ii) (only for Govt. employees) xxx
Professional Tax/Tax on employment (paid by employer/ xxx
employee) u/s 16(iii)
Income under the head “Salaries” under optional tax regime xxx
PERQUISITE VALUE OF MOTOR CAR

S. Car Expenses Wholly Partly personal use
No. owned/ met by official
hired by use
1 Employer Employer No
value* cc of engine Perquisite value
upto 1.6 litres ` 1,800 p.m.
above 1.6 litres ` 2,400 p.m.
If chauffeur is also provided, ` 900 p.m.
should be added to the above value.
2 Employee Employer No Actual amount of expenditure incurred by
value* the employer as reduced by the perquisite
value arrived at in (1) above.
3 Employer Employee -
cc of engine Perquisite value
upto 1.6 litres ` 600 p.m.
above 1.6 litres ` 900 p.m.
*provided employer maintains the complete details of such journey and expenditure thereon and
gives a certificate that such expenditure are incurred wholly for official use.

3.12 INCOME TAX LAW
Perquisite value of motor car is taxable only in case of specified employees

if motor car is provided by the employer to the employee. However, where
the motor car is owned by the employee and used by him or members of
his family wholly for personal purpose and for which employer reimburses the running
and maintenance expenses of the car, the perquisite value of motor car would be taxable
in case of all employees.
• Where car is owned by employer and expenses are also met by the employer, the
taxable perquisite in case such car is used wholly for personal purposes of the employee
would be equal to the actual expenditure incurred by the employer on running and
maintenance expenses and normal wear and tear (calculated @10% p.a. of actual cost
of motor car) less amount charged from the employee for such use.
1.1 INTRODUCTION
The provisions pertaining to Income under the head “Salaries” are contained in
section 15, 16 and 17 in the following manner.
Deduction
(Section 16)
- Standard deduction
- Entertainment allowance$
- Professional tax$
Chargeability
(Section 15) Meaning
- Salary due (Section 17)
- Salary paid or allowed, though - Salary
Income - Perquisite
not due
under the - Profits in lieu of salary
- Arrears of salary
head
"Salaries"
$
Deduction for Entertainment allowance for Government employees and Professional tax are
allowable only under the optional tax regime i.e., if the employee exercises the option of shifting out
of the default tax regime provided under section 115BAC(1A). The same is not allowable under the
default tax regime under section 115BAC.
Before learning the provisions, it is essential to understand the important concepts

relating to Salaries.
(1) Employer-employee relationship: Every payment made by an employer to
his employee for service rendered would be chargeable to tax as salaries.

SALARIES 3.13
Before an income can become chargeable under the head ‘salaries’, it is vital
that there should exist between the payer and the payee, the relationship of
an employer and an employee.
Example: Sujata, an actress, is employed in Chopra Films, where she is paid a

monthly remuneration of ` 2 lakhs. She acts in various films produced by
various producers. The remuneration for acting in such films is directly paid to
Chopra Films by the different producers.
In this case, ` 2 lakhs will constitute salary in the hands of Sujata, since the
relationship of employer and employee exists between Chopra Films and
Sujata.
Example: In the above example, if Sujata acts in various films and gets fees
from different producers, the same income will be chargeable as income from
profession since the relationship of employer and employee does not exist
between Sujata and the film producers.
Example: Commission received by a director from a company is salary if the
Director is an employee of the company. If, however, the Director is not an
employee of the company, the said commission cannot be charged as salary
but has to be charged either as income from business or as income from other
sources depending upon the facts.
Example: Salary paid to a partner by a firm is nothing but an appropriation of
profits. Any salary, bonus, commission or remuneration by whatever name
called due to or received by partner of a firm shall not be regarded as salary.
The same is to be charged as income from profits and gains of business or
profession. This is primarily because the relationship between the firm and its
partners is not that of an employer and employee.
Example: Remuneration received by a Member of Parliament/State Legislature

is not taxable under the head ‘Salaries’ as such person is not a government
employee. Such income would be taxable as ‘Income from Other Sources’.
(2) Full-time or part-time employment: Once the relationship of employer and

employee exists, the income is to be charged under the head “salaries”. It
does not matter whether the employee is a full-time employee or a part-time
one.

3.14 INCOME TAX LAW
If, for example, an employee works with more than one employer, salaries
received from all the employers should be clubbed and brought to charge for
the relevant previous years.
(3) Forgoing of salary: Once salary accrues, the subsequent waiver by the
employee does not absolve him from liability to income-tax. Such waiver is
only an application and hence, chargeable to tax.
Example:
Mr. A, an employee instructs his employer that he is not interested in receiving
the salary for April 2024 and the same might be donated to a charitable
institution.
In this case, Mr. A cannot claim that he cannot be charged in respect of the salary
for April 2024. It is only due to his instruction that the donation was made to a
charitable institution by his employer. It is only an application of income.
Hence, the salary for the month of April 2024 will be taxable in the hands of
Mr. A. He is, however, entitled to claim a deduction under section 80G for the
amount donated to the institution. Deduction under section 80G is available
only if Mr. A exercises the option of shifting out of the default tax regime
provided under section 115BAC(1A). [The concept of deductions is explained in
detail in Chapter 6].
(4) Surrender of salary: However, if an employee surrenders his salary, in the

public interest, to the Central Government under section 2 of the Voluntary
Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so
surrendered would be exempt while computing his taxable income.
(5) Salary paid tax-free: This, in other words, means that the employer bears
the burden of the tax on the salary of the employee. In such a case, the
income from salaries in the hands of the employee will consist of his salary
income and also the tax on this salary paid by the employer.
However, as per section 10(10CC), the income-tax paid by the employer on
non-monetary perquisites on behalf of the employee would be exempt in the
hands of the employee.
(6) Place of accrual of salary: Under section 9(1)(ii), salary earned in India is
deemed to accrue or arise in India even if it is paid outside India or it is paid
or payable after the contract of employment in India comes to an end.

SALARIES 3.15
If an employee is paid pension abroad in respect of services rendered in India,

the same will be deemed to accrue in India. Similarly, leave salary paid abroad
in respect of leave earned in India is deemed to accrue or arise in India.
Section 9(1)(iii) provides that salaries payable by the Government to a citizen
of India for services outside India shall be deemed to accrue or arise in India.
However, by virtue of section 10(7), any allowance or perquisites paid or
allowed outside India by the Government to a citizen of India for rendering
services outside India will be fully exempt. Individual assessees who are not
citizens of India are entitled to the following exemptions in respect of
remuneration/ salary received by them under section 10(6):
(i) Remuneration received by officials of Embassies etc. of Foreign
States [Section 10(6)(ii)]
The remuneration received by a person for services as an official of an
embassy, high commission, legation, commission, consulate or the
trade representation of a foreign State or as a member of the staff of
any of these officials is exempt.
Conditions:
(a) The remuneration received by our corresponding Government
officials or members of the staff resident in such foreign countries
for similar purposes should be exempt.
(b) The above-mentioned members of the staff should be the subjects

of the respective countries represented and should not be engaged
in any other business or profession or employment in India.
(ii) Remuneration received for services rendered in India as an
employee of foreign enterprise [Section 10(6)(vi)]
Remuneration received by a foreign national as an employee of a
foreign enterprise for service rendered by him during his stay in India
is also exempt from tax.
Conditions:
(a) The foreign enterprise is not engaged in any business or trade in

India;
(b) The employee’s stay in India does not exceed 90 days during the
previous year;

3.16 INCOME TAX LAW
(c) The remuneration is not liable to be deducted from the

employer’s income chargeable to tax under the Act.
(iii) Salary received by a non-citizen non-resident for services rendered

in connection with employment on foreign ship [Section 10(6)(viii)]
Salary income received by or due to a non-citizen of India who is also
non-resident for services rendered in connection with his employment
on a foreign ship is exempt where his total stay in India does not exceed
90 days during the previous year.
(iv) Remuneration received by Foreign Government employees during
their stay in India for specified training [Section 10(6)(xi)]
Any remuneration received by employees of foreign Government from

their respective Government during their stay in India, is exempt from
tax, if such remuneration is received in connection with their training in
any establishment or office of or in any undertaking owned by –
(a) the Government; or
(b) any company wholly owned by the Central or any State

Government(s) or jointly by the Central and one or more State
Governments; or
(c) any company which is subsidiary of a company referred to in (b)

above; or
(d) any statutory corporation; or
(e) any society registered under the Societies Registration Act, 1860
or any other similar law, which is wholly financed by the Central
Government or any State Government(s) or jointly by the Central
and one or more State Governments. Now, let us discuss the
chargeability under section 15, the provisions explaining the
meaning of Salary, Perquisite and Profits in lieu of salary
contained in section 17 and the deductions under section 16.
Exemption under section 10(6) and 10(7) would be available to an
assessee irrespective of the regime under which he pays tax.

SALARIES 3.17
1.2 BASIS OF CHARGE [SECTION 15]

(i) Section 15 deals with the basis of charge under the head “Salaries”. Salary is
chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier.
(ii) However, where any salary, paid in advance, is assessed in the year of
payment, it cannot be subsequently brought to tax in the year in which it
becomes due.
(iii) If the salary paid in arrears has already been assessed on due basis, the same
cannot be taxed again when it is paid.
Example: If A draws his salary in advance for the month of April 2025 in the month
of March 2025 itself, the same becomes chargeable on receipt basis and is to be
assessed as income of the P.Y.2024-25 i.e., A.Y.2025-26. However, the salary for the
A.Y.2026-27 will not include that of April 2025.
Example: If the salary due for March 2025 is received by A later in the month of April
2025, it is still chargeable as income of the P.Y.2024-25 i.e., A.Y.2025-26 on due
basis. Obviously, salary for the A.Y.2026-27 will not include that of March 2025.
1.2.1 Advance Salary

Advance salary is taxable when it is received by the employee irrespective of the
fact whether it is due or not. The rule behind this is the basis of taxability of salary
i.e., salary is taxed on due or receipt basis, whichever is earlier.
It may so happen that when advance salary is included and charged in a particular
previous year, the rate of tax at which the employee is assessed may be higher than
the normal rate of tax to which he would have been assessed. Section 89 provides
relief in these types of cases. The concept of relief under section 89 is explained in
this unit later on.
Difference between advance salary and advance against salary
Loan is different from salary. When an employee takes a loan from his employer,
which is repayable in certain specified installments, the loan amount cannot be
brought to tax as salary of the employee.
Similarly, advance against salary is different from advance salary. It is an advance
taken by the employee from his employer. This advance is generally adjusted with
his salary over a specified time period. It cannot be taxed as salary.

3.18 INCOME TAX LAW
1.2.2 Arrears of salary

Normally speaking, salary arrears must be charged on due basis. However, there
are circumstances when it may not be possible to bring the same to charge on due
basis.
Example:
If the Pay Commission is appointed by the Central Government and it recommends
revision of salaries of employees with retrospective date, the arrears received in that
connection will be charged on receipt basis. Here also, relief under section 89 is
available.
Example:
If the Central Government announces an increase in HRA in the P.Y. 2024-25 which
is effective from 1.1.2023, then the arrears from 1.1.2023 to 31.3.3024 will be taxed
in the previous year in which they are paid because they were never due earlier. Here
also, relief under section 89 is available.
1.3 SALARY, PERQUISITE AND PROFITS IN LIEU

OF SALARY [SECTION 17]
Section 17
Perquisite Profits in lieu of salary

Salary [Section 17(1)]
[Section 17(2)] [Section 17(3)]
1.3.1 Meaning of Salary

The meaning of the term ‘salary’ for purposes of income-tax is much wider than
what is normally understood. The term ‘salary’ for the purposes of Income-tax Act,
1961 will include both monetary payments (e.g. basic salary, bonus, commission,
allowances etc.) as well as non-monetary facilities (e.g. housing accommodation,
medical facility, interest free loans etc.).
Section 17(1) defines the term “Salary”. It is an inclusive definition and includes
monetary as well as non-monetary items.

SALARIES 3.19
‘Salary’ under section 17(1), includes the following:

(i) wages,
(ii) any annuity or pension,
(iii) any gratuity,
(iv) any fees, commission, perquisites or profits in lieu of or in addition to any
salary or wages,
(v) any advance of salary,
(vi) any payment received in respect of any period of leave not availed by him
i.e., leave salary or leave encashment,
(vii) Provident Fund:
- the portion of the annual accretion in any previous year to the
balance at the credit of an employee participating in a recognised
provident fund to the extent it is taxable and
- transferred balance in recognized provident fund to the extent it is
taxable,
(viii) the contribution made by the Central Government or any other employer
in the previous year to the account of an employee under a pension
scheme referred to in section 80CCD.
(ix) the contribution made by the Central Government in the previous year,
to the Agniveer Corpus Fund account of an individual enrolled in the
Agnipath Scheme referred to in section 80CCH.
(1) Wages
In common parlance, the term “wages” means fixed regular payment earned for
work or services. The words “wages”, “salary”, “basic salary” are used
interchangeably. Moreover, the payments in the form of Bonus, Allowances etc.
made to the employee are also included within the meaning of salary.
Under the Income-tax Act, there are certain payments made which are fully taxable,
partly taxable and fully exempt. For Example, wages, salary, bonus, dearness
allowance etc. are fully taxable payments. Whereas monetary benefits in the form
of allowances such as House Rent Allowance, conveyance allowance etc. are
partially taxable.

3.20 INCOME TAX LAW
Allowances
Allowances are monetary payments made by the employer to the employees for
meeting specific expenditure, whether personal or for the performance of duties.
Under the Income-tax Act, 1961, allowance is taxable on due or receipt basis,
whichever is earlier. These allowances are generally taxable unless some specific
exemption has been provided in respect of such allowance. Various types of
allowances normally in vogue are discussed below:
Allowances
Fully Taxable under Fully Taxable under Fully Exempt only
both regimes default tax regime/ under the optional tax
Partly Exempt under regime
the optional tax
regime
(i) Entertainment (i) House Rent (i)Allowances to High
Allowance Allowance [u/s Court Judges
(ii) Dearness Allowance 10(13A)] (ii) Salary and
(iii) Overtime Allowance (ii) Special Allowances Allowances paid by
(iv) Fixed Medical [u/s 10(14)] the United Nations
Allowance Except Organization
(v) City Compensatory (a) Travelling (iii) Sumptuary allowance
Allowance (to meet allowance granted to High
increased cost of (b) Daily allowance Court or Supreme
living in cities) Court Judges
(c) Conveyance
(vi) Interim Allowance allowance
(vii) Servant Allowance (d) Transport Note – In cases (i) and (iii)
(viii) Project Allowance allowance to above, the respective Acts
(ix) Tiffin/Lunch/Dinner blind/ deaf and provide for such
dumb/ exemption,
Allowance
orthopedically notwithstanding anything
(x) Any other cash contained in the Income-
handicapped
allowance tax Act, 1961. In case (ii),
employee
(xi) Warden Allowance exemption is provided
Note – The exceptions
(xii) Non-practicing under the respective Act,
in (a) to (d) above are
Allowance notwithstanding anything
partly exempt under
(xiii) Transport allowance to the contrary contained
both the tax regimes.
to employee other in any other law.

SALARIES 3.21
than blind/ deaf and Fully Exempt under

dumb/ both tax regimes
orthopedically
Allowance granted to
handicapped
Government employees
employee
outside India [Section
10(7)]
(A) Allowances which are fully taxable under both regime

(1) City compensatory allowance: City Compensatory Allowance is normally
intended to compensate the employees for the higher cost of living in cities.
It is taxable irrespective of the fact whether it is given as compensation for
performing his duties in a particular place or under special circumstances.
(2) Entertainment allowance: This allowance is given to employees to meet the
expenses towards hospitality in receiving customers etc. The Act gives a
deduction towards entertainment allowance only to a Government employee
in case he exercises the option of shifting out of the default tax regime
provided under section 115BAC(1A). The details of deduction permissible are
discussed later on in this Unit.
(3) Transport allowance: Transport allowance granted to an employee to meet
his expenditure for the purpose of commuting between the place of his
residence and the place of his duty is fully taxable. However, in case of blind/
deaf and dumb/ orthopedically handicapped employees exemption upto
` 3,200 p.m. is provided under section 10(14)(ii) read with Rule 2BB. This
exemption would be available under both regimes.
(B) Allowances which are partially exempt under the optional tax
regime/Allowances which are fully taxable under default tax regime
(1) House rent allowance [Section 10(13A)]: HRA is a special allowance
specifically granted to an employee by his employer towards payment of rent
for residence of the employee. HRA granted to an employee is exempt to the
extent of least of the following, in case such assessee exercises the option of
shifting out of the default tax regime provided under section 115BAC(1A):

3.22 INCOME TAX LAW
Metro Cities (i.e., Delhi, Kolkata, Other Cities

Mumbai, Chennai)
1) HRA actually received for the 1) HRA actually received for the
relevant period relevant period
2) Rent paid (-) 10% of salary for 2) Rent paid (-) 10% of salary for
the relevant period the relevant period
3) 50% of salary for the relevant 3) 40% of salary for the relevant
period period
• Exemption u/s 10(13A) would be available to an assessee only

if he exercises the option of shifting out of the default tax regime
provided u/s 115BAC(1A). It is not available under the default tax
regime u/s 115BAC.
• Exemption is not available to an assessee who lives in his own house, or in
a house for which he has not incurred the expenditure of rent.
• “Salary” for this purpose means basic salary, dearness allowance, if provided
in terms of employment and commission as a fixed percentage of turnover.
• Relevant period means the period during which the said accommodation was
occupied by the assessee during the previous year.
ILLUSTRATION 1
Mr. Raj Kumar has the following receipts from his employer:
(1) Basic pay ` 40,000 p.m.
(2) Dearness allowance (D.A.) ` 6,000 p.m.
(3) Commission ` 50,000 p.a.
(4) Motor car for personal use (expenses met by the employer) ` 1,500 p.m.
(5) House rent allowance ` 15,000 p.m.
Find out the amount of HRA exempt in the hands of Mr. Raj Kumar assuming
that he paid a rent of ` 16,000 p.m. for his accommodation at Kanpur. DA forms
part of salary for retirement benefits. Mr. Raj Kumar exercises the option of
shifting out of the default tax regime provided under section 115BAC(1A).

SALARIES 3.23
SOLUTION
HRA received ` 1,80,000
Less: Exempt under section 10(13A) [Note] ` 1,36,800
Taxable HRA ` 43,200
Note: Exemption shall be least of the following three limits:
(a) the actual amount received (` 15,000 × 12) = ` 1,80,000
(b) excess of the actual rent paid by the assessee over 10% of his salary
= Rent Paid (-) 10% of salary for the relevant period
= (` 16,000×12) (-) 10% of [(` 40,000+` 6,000) × 12]
= ` 1,92,000 - ` 55,200 = ` 1,36,800
(c) 40% salary as his accommodation is situated at Kanpur
= 40% of [(` 40,000+ ` 6,000) × 12] = ` 2,20,800
Note: For the purpose of exemption under section 10(13A), salary includes
dearness allowance only when the terms of employment so provide but
excludes all other allowances and perquisites.
(2) Special allowances to meet expenses relating to duties or personal
expenses [Section 10(14)]
This clause provides for exemption (as per Rule 2BB) in respect of the following:
(i) Special allowances or benefit, not being in the nature of a perquisite,
specifically granted to meet expenses incurred wholly, necessarily and
exclusively in the performance of the duties of an office or employment
of profit [Section 10(14)(i)]
These allowances would be exempt to the extent such expenses are
actually incurred for that purpose. In other words, actual allowance
received, or actual amount spent for the performance of the duties of
an office or employment of profit, whichever is less would be exempt.
(ii) Special allowances granted to the assessee either to meet his personal
expenses at the place where the duties of his office or employment of
profit are ordinarily performed by him or at the place where he
ordinarily resides or to compensate him for the increased cost of living
[Section 10(14)(ii)].

3.24 INCOME TAX LAW
For the allowances under this category, there is a limit on the amount
which the employee can receive from the employer. Any amount
received by the employee in excess of these specified limits will be
taxable in his hands as income from salary for the year. It does not
matter whether the amount which is received is actually spent or not by
the employee for the purpose for which it was given to him.
Rule 2BB
The following allowances have been prescribed in Rule 2BB:
Allowances prescribed for the purposes of section 10(14)(i)

(a) any allowance granted to meet the expenditure incurred on a helper
where such helper is engaged in the performance of the duties of an
office or employment of profit (Helper Allowance);
(b) any allowance granted for encouraging the academic, research and
training pursuits in educational and research institutions (Research
allowance);
(c) any allowance granted to meet the expenditure on the purchase or
maintenance of uniform for wear during the performance of the duties
of an office or employment of profit (Uniform Allowance).
Allowances prescribed for the purposes of section 10(14)(ii)
S. Name of Allowance Extent to which allowance

No. is exempt
1. Any Special Compensatory Allowance ` 800 or ` 300 per month
in the nature of Special depending upon the
Compensatory (Hilly Areas) specified locations
Allowance or High Altitude ` 7,000 per month in Siachen
Allowance or Uncongenial Climate area of Jammu and Kashmir
Allowance or Snow Bound Area
Allowance or Avalanche Allowance
2. Any Special Compensatory Allowance ` 1,300 or ` 1,100 or
in the nature of border area ` 1,050 or ` 750 or ` 300 or
allowance or remote locality ` 200 per month depending
allowance or difficult area upon the specified locations
allowance or disturbed area
allowance

SALARIES 3.25
3. Special Compensatory (Tribal ` 200 per month

Areas/Schedule Areas/Agency
Areas) Allowance [Specified States]
4. Any allowance granted to an 70% of such allowance upto a
employee working in any transport maximum of ` 10,000 per
system to meet his personal month
expenditure during his duty
performed in the course of running
such transport from one place to
another, provided that such employee
is not in receipt of daily allowance
5. Children Education Allowance ` 100 per month per child
upto a maximum of two
children
6. Any allowance granted to an ` 300 per month per child
employee to meet the hostel upto a maximum of two
expenditure on his child children
7. Compensatory Field Area ` 2,600 per month
Allowance [Specified areas in
Specified States]
8. Compensatory Modified Field Area ` 1,000 per month
Allowance [Specified areas in
Specified States]
9. Any special allowance in the nature of ` 3,900 per month
counter insurgency allowance
granted to the members of the armed
forces operating in areas away from
their permanent locations.
10. Underground Allowance granted to ` 800 per month
an employee who is working in
uncongenial, unnatural climate in
underground mines.
11. Any special allowance in the nature of
high Altitude allowance granted to
the member of the armed forces
operating in high altitude areas

3.26 INCOME TAX LAW
For altitude of 9,000 to 15,000 feet ` 1,060 per month

For above 15,000 feet ` 1,600 per month
special compensatory highly active
field area allowance granted to the
member of the armed forces
Island (duty) allowance granted to
the member of the armed forces in
Andaman & Nicobar and
Lakshadweep Group of Islands
Any assessee claiming exemption in respect of allowances mentioned at serial

numbers 7 & 8 and 9 shall not be entitled to exemption in respect of the
allowance and disturbed area allowance referred at serial number 2,
respectively.
(C) Allowances which are partly exempt under both regimes
The following allowances prescribed in Rule 2BB would be exempt under both the
default and optional tax regimes:
Allowances prescribed for the purposes of section 10(14)(i)
(a) any allowance granted to meet the cost of travel on tour or on transfer
(Travelling Allowance);
Explanation - “allowance granted to meet the cost of travel on transfer”
includes any sum paid in connection with the transfer, packing and
transportation of personal effects on such transfer.
(b) any allowance, whether granted on tour or for the period of journey in
connection with transfer, to meet the ordinary daily charges incurred by an
employee on account of absence from his normal place of duty (Daily
allowance);
(c) any allowance granted to meet the expenditure incurred on conveyance in

performance of duties of an office or employment of profit (Conveyance
Allowance);
Allowances prescribed for the purposes of section 10(14)(ii)

Any transport allowance granted to an employee who is blind or deaf and dumb or
orthopedically handicapped with disability of the lower extremities of the body, to

SALARIES 3.27
meet his expenditure for commuting between his residence and place of duty would
be exempt upto ` 3,200 per month.
ILLUSTRATION 2
Mr. Srikant has two sons. He is in receipt of children education allowance of

` 150 p.m. for his elder son and ` 70 p.m. for his younger son. Both his sons are going
to school. He also receives the following allowances:
Transport allowance : ` 1,800 p.m.
Tribal area allowance : ` 500 p.m.
Compute his taxable allowances
SOLUTION
Taxable allowance in the hands of Mr. Srikant is computed as under -
If Mr. Srikant exercises the option of shifting out of the default tax regime
provided under section 115BAC
Children Education Allowance:
Elder son [(` 150 – ` 100) p.m. × 12 months] = ` 600
Younger son [(` 70 – ` 70) p.m. × 12 months] = Nil ` 600
Transport allowance (` 1,800 p.m. × 12 months) ` 21,600
Tribal area allowance [(` 500 – ` 200) p.m. × 12 months] ` 3,600
Taxable allowances ` 25,800
If Mr. Srikant pays tax under default tax regime under section 115BAC
Children Education Allowance [(` 150 + ` 70) p.m. × 12 months] ` 2,640
Transport allowance (` 1,800 p.m. × 12 months) ` 21,600
Tribal area allowance (` 500 p.m. × 12 months) ` 6,000
Taxable allowances ` 30,240
(D) Allowances which are fully exempt only under the optional tax
regime (i.e., the normal provisions of the Act)
(1) Allowance to Supreme Court/ High Court Judges: Any allowance paid to a
Judge of a High Court and Supreme Court under section 22A(2) of the High
Court Judges (Conditions of Service) Act, 1954 and section 23(1A) of the

3.28 INCOME TAX LAW
Supreme Court Judges (Salaries and Conditions of services) Act, 1958,

respectively, is not taxable under the optional tax regime (i.e., normal
provisions of the Act).
(2) Allowance received from United Nations Organisation (UNO): Salary and
Allowance paid by the UNO to its employees is not taxable by virtue of section
2 of the United Nations (Privileges and Immunities) Act, 1947. Besides salary,
any pension covered under the United Nations (Privileges and Immunities) Act
and received from UNO is also exempt from tax under the optional tax regime
(i.e., normal provisions of the Act).
(3) Sumptuary allowance: Sumptuary allowance given to High Court Judges
under section 22C of the High Court Judges (Conditions of Service) Act, 1954
and Supreme Court Judges under section 23B of the Supreme Court Judges
(Conditions of Service) Act, 1958 is not chargeable to tax under the optional
tax regime (i.e., normal provisions of the Act)
Note – In cases (1) and (3) above, the respective Acts provide for such exemption,
notwithstanding anything contained in the Income-tax Act, 1961. In case (2),
exemption is provided under the respective Act, notwithstanding anything to the
contrary contained in any other law.
(E) Allowances which are fully exempt under both regimes
Allowances payable outside India [Section 10(7)]: Allowances or perquisites paid
or allowed as such outside India by the Government to a citizen of India for services
rendered outside India are exempt from tax.
(2) Annuity or Pension
Meaning of Annuity
• As per the definition, ‘annuity’ is treated as salary. Annuity is a sum payable
in respect of a particular year. It is a yearly grant. If a person invests some
money entitling him to series of equal annual sums, such annual sums are
annuities in the hands of the investor.
• Annuity received by a present employer is to be taxed as salary. It does not
matter whether it is paid in pursuance of a contractual obligation or
voluntarily.
• Annuity received from a past employer is taxable as profit in lieu of salary.
• Annuity received from person other than an employer is taxable as “income
from other sources”.

SALARIES 3.29
Pension
Concise Oxford Dictionary defines ‘pension’ as a periodic payment made especially by
Government or a company or other employers to the employee in consideration of
past service payable after his retirement.
Pension is of two types: commuted and uncommuted.
• Uncommuted Pension: Uncommuted pension refers to pension received
periodically. It is fully taxable in the hands of both government and non-
government employees.
• Commuted Pension: Commutation means inter-change. Commuted pension
means lump sum amount taken by commuting the whole or part of the pension.
Many persons convert their future right to receive pension into a lumpsum
amount receivable immediately.
Example:
Suppose a person is entitled to receive a pension of say ` 10,000 p.m. for the rest
of his life. He may commute ¼th i.e., 25% of this amount and get a lumpsum of
say ` 1,50,000. After commutation, his pension will now be the balance 75% of
` 10,000 p.m. = ` 7,500 p.m.
Exemption in respect of Commuted Pension [Section 10(10A)]
As per section 10(10A), the payment in respect of commuted pension is exempt,

subject to the conditions specified therein. Its tax treatment is depicted hereunder:
Pension
Commuted Uncommuted
Fully
Employees of the Central Other Employees taxable
Government/ local authorities/
Statutory Corporation/ members of
Civil Services/ Defence Services etc. If the employee does
If the employee is in
not receive any
receipt of gratuity
gratuity
Fully exempt u/s
10(10A)(i) 1/2 x (commuted
1/3 x (commuted pension pension received ÷
received ÷ commutation %) x commutation %) x 100,
100, would be exempt u/s would be exempt u/s
10(10A)(ii)(a) 10(10A)(ii)(b)

3.30 INCOME TAX LAW
• Exemption u/s 10(10A) in respect of commuted pension is available

to an assessee irrespective of the regime under which he pays tax.
• Judges of the Supreme Court and High Court will be entitled to the
exemption of the commuted portion u/s 10(10A)(i).
ILLUSTRATION 3
Mr. Sagar who retired on 1.10.2024 is receiving ` 5,000 p.m. as pension. On 1.2.2025,
he commuted 60% of his pension and received ` 3,00,000 as commuted pension. You
are required to compute his taxable pension assuming:
(a) He is a government employee.
(b) He is a private sector employee and received gratuity of ` 5,00,000 at the time
of retirement.
(c) He is a private sector employee and did not receive any gratuity at the time of
retirement.
SOLUTION
(a) He is a government employee
Uncommuted pension received (October – March) ` 24,000
[(` 5,000 × 4 months) + (40% of ` 5,000 × 2 months)]
Commuted pension received ` 3,00,000
Less: Exempt u/s 10(10A) ` 3,00,000 NIL
Taxable pension ` 24,000
(b) He is a private sector employee and received gratuity ` 5,00,000 at the
time of retirement
[(` 5,000 × 4 months) + (40% of ` 5,000 × 2 months)]
Less: Exempt u/s 10(10A)
 1 ` 3,00,000  ` 1,66,667 ` 1,33,333
 × × 100% 
 3 60% 
Taxable pension ` 1,57,333

SALARIES 3.31
(c) He is a private sector employee and did not receive any gratuity at the
time of retirement
[(` 5,000 × 4 months) + (40% of ` 5,000 × 2 months)]
Less: Exempt u/s 10(10A)
 1 ` 3,00,000  ` 2,50,000 ` 50,000
 × × 100% 
2 60% 
Taxable pension ` 74,000
Exemption in respect of pension received by recipient of gallantry awards
[Section 10(18)]
Any income by way of pension received by an individual is exempt from income-
tax if –
(a) such individual was an employee of Central or State Government and
(b) has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or
such other gallantry award notified by the Central Government in this behalf.
In case of the death of such individual, any income by way of family pension received
by any member of the family of such individual shall also be exempt under this clause.
“Family”, in relation to an individual, means –
- The spouse and children of the individual; and
- The parents, brothers and sisters of the individuals or any of them, wholly or
mainly dependent on the individual.
Exemption under section 10(18) would be available to an assessee
irrespective of the regime under which he pays tax.
Exemption of disability pension granted to disabled personnel of armed forces

who have been invalided on account of disability attributable to or aggravated
by such service [Circular No. 13/2019, dated 24.6.2019]
The entire disability pension, i.e., “disability element” and “service element” of
pension granted to members of naval, military or air forces who have been
invalided out of naval, military or air force service on account of bodily disability
attributable to or aggravated by such service would be exempt from tax.
The CBDT has, vide this circular, clarified that exemption in respect of disability
pension would be available to all armed forces personnel (irrespective of rank) who
have been invalided out of such service on account of bodily disability attributable

3.32 INCOME TAX LAW
to or aggravated by such service. However, such tax exemption will be available

only to armed forces personnel who have been invalided out of service on account
of bodily disability attributable to or aggravated by such service and not to
personnel who have been retired on superannuation or otherwise.
(3) Gratuity
Gratuity is a voluntary payment made by an employer in appreciation of services
rendered by the employee. Now-a-days gratuity has become a normal payment
applicable to all employees. In fact, Payment of Gratuity Act, 1972 is a statutory
recognition of the concept of gratuity. Almost all employers enter into an
agreement with employees to pay gratuity.
Exemption in respect of Gratuity [Section 10(10)]
Gratuity
Received during Received at the time of

service retirement/Death
Fully
Taxable Other
Received under the
Employees
Pension Code or
Regulations applicable
to members of the Covered under the *Not covered under
Defence Service/ Payment of the Payment of
Employees of Central Gratuity Act, 1972 Gratuity Act, 1972
Government/ Members Least of the
of Civil Services/ local Least of the following
following would be
authority employees etc. would be exempt u/s
exempt u/s
10(10)(ii):
10(10)(iii):
- ` 20 lakh
- ` 20 lakh
Fully Exempt - Actual gratuity
- Actual gratuity
u/s 10(10)(i) received
received
- 15 days' salary$ (based
- Half month salary#
on last drawn salary) for
(based on avg of last
every completed year of
10 months salary) for
service or part in excess
every completed
of 6 months (No. of
year of service
days in a month to be
(fraction to be
taken as 26)
ignored)
*Any death cum retirement gratuity received by an employee on his retirement or his becoming
incapacitated prior to such retirement or on his termination or any gratuity received by his
widow, children or dependents on his death
$
Salary for this purpose means basic salary and dearness allowance. No. of days in a month
for this purpose, shall be taken as 26.
#
Salary for this purpose means basic salary and dearness allowance, if provided in the terms
of employment for retirement benefits, forming part of salary and commission which is
expressed as a fixed percentage of turnover.

SALARIES 3.33
• Where gratuity is received from 2 or more employers in the same previous year, then,
aggregate amount of gratuity exempt from tax cannot exceed ` 20,00,000.
• Where gratuity is received in any earlier previous year from former employer and
again received from another employer in a later previous year, the limit of
` 20,00,000 will be reduced by the amount of gratuity exempt earlier.
• It is important to note the difference in definition of “Salary” and the manner of
computation of the third limit in case of employees covered under the Payment of
Gratuity Act, 1972 and those not covered for determining the amount of exempt
gratuity.
• Exemption under section 10(10) would be available to an assessee irrespective of

the regime under which he pays tax.
ILLUSTRATION 4
Mr. Ravi retired on 15.6.2024 after completion of 26 years 8 months of service and
received gratuity of ` 15,00,000. At the time of retirement, his salary was:
Basic Salary : ` 50,000 p.m.

Dearness Allowance : ` 10,000 p.m. (60% of which is for retirement benefits)
Commission : 1% of turnover (turnover in the last 12 months was
` 1,20,00,000)
Bonus : ` 25,000 p.a.
Compute his taxable gratuity assuming:
(a) He is private sector employee and covered by the Payment of Gratuity Act,
1972.
(b) He is private sector employee and not covered by Payment of Gratuity Act,
1972.
(c) He is a Government employee.
SOLUTION
(a) He is covered by the Payment of Gratuity Act 1972
Gratuity received at the time of retirement ` 15,00,000
Less: Exemption under section 10(10)

3.34 INCOME TAX LAW
Least of the following:
i. Gratuity received ` 15,00,000
ii. Statutory limit ` 20,00,000
iii. 15 days’ salary based on last drawn
salary for each completed year of service
or part thereof in excess of 6 months

15
×last drawn salary × years of service
26
15
× (50,000 + 10,000) x 27= ` 9,34,615 ` 9,34,615
26
Taxable Gratuity ` 5,65,385
(b) He is not covered by the Payment of Gratuity Act 1972
Less: Exemption under section 10(10) (Note) ` 8,58,000
Taxable Gratuity ` 6,42,000
Note: Exemption under section 10(10) is least of the following:
(i) Gratuity received ` 15,00,000
(ii) Statutory limit ` 20,00,000
(iii) Half month’s salary based on average salary of last 10 months

preceding the month of retirement for each completed year of service.
1
i.e. ×Average salary × years of service
2
  10  
( 50,000 × 10 ) + (10,000 × 60% × 10 ) +  1% × 1,20,00,000 × 12  
1  
= × × 26
2 10
=` 8,58,000

SALARIES 3.35
(c) He is a government employee
Less: Exemption under section 10(10) ` 15,00,000
Taxable gratuity Nil
(4) Fees, commission, perquisites or profits in lieu of or in addition to

any salary or wages
The payment in the form of fees or commission by the employer to the employee
are fully taxable. Commission may be paid as fixed percentage of turnover or net
profits etc.
Section 17(2) and 17(3) contain the provisions relating to perquisites and profits in
lieu of salary, respectively. The provisions of these sections would be discussed in
detail separately in this unit.
(5) Any Advance of Salary

The treatment of “Advance Salary” is already discussed in this unit.
(6) Leave Salary or Leave Encashment

Generally, employees are allowed to take leave during the period of service.
Employees may avail such leave or in case the leave is not availed, then the leave
may either lapse or be accumulated for future or allowed to be encashed every year
or at the time termination/ retirement. The payment received on account of
encashment of unavailed leave would form part of the salary. However, section
10(10AA) provides exemption in respect of amount received by way of encashment
of unutilised earned leave by an employee at the time of his retirement, whether
on superannuation or otherwise.
Exemption of amount received by way of encashment of unutilised earned leave

on retirement [Section 10(10AA)]
The taxability and exemption provisions are depicted hereunder:

3.36 INCOME TAX LAW
Leave Encashment
Received during the Received on retirement, whether on

period of service superannuation or otherwise
Fully Taxable
By a Government employee By any other employee
Fully exempt u/s Least of the following is

10(10AA)(i) exempt u/s 10(10AA)(ii)
` 25,00,000 Leave salary 10 months' salary (on Cash equivalent of

actually received the basis of average unavailed leave (Based on
salary of last 10 months last 10 months average
preceding retirement) salary) to his credit at the
time of retirement
Earned leave entitlement cannot exceed 30 days for every year of actual
service rendered for the employer from whose service he has retired
• Where leave salary is received from two or more employers in the

same previous year, then the aggregate amount of leave salary exempt
from tax cannot exceed ` 25,00,000.
• Where leave salary is received in any earlier previous year from a former
employer and again received from another employer in a later previous year, the
limit of ` 25,00,000 will be reduced by the amount of leave salary exempt earlier.
• Salary for this purpose means basic salary and dearness allowance, if provided
in the terms of employment for retirement benefits and commission which is
expressed as a fixed percentage of turnover.
• ‘Average salary’ will be determined on the basis of the salary drawn during the
period of ten months immediately preceding the date of his retirement whether
on superannuation or otherwise.
• Exemption under section 10(10AA) would be available to an assessee irrespective
of the regime under which he pays tax.

SALARIES 3.37
ILLUSTRATION 5
Mr. Gupta retired on 1.12.2024 after 20 years of service and received leave salary of
` 5,00,000. Other details of his salary income are:
Basic Salary : ` 5,000 p.m. (` 1,000 was increased w.e.f. 1.4.2024)
Dearness Allowance : ` 3,000 p.m. (60% of which is for retirement benefits)
Commission : ` 500 p.m.
Bonus : ` 1,000 p.m.
Leave availed during service : 480 days
He was entitled to 30 days leave every year.

You are required to compute his taxable leave salary assuming:
(a) He is a government employee.
(b) He is a non-government employee.
SOLUTION
(a) He is a government employee
Leave Salary received at the time of retirement ` 5,00,000
Less: Exemption under section 10(10AA) ` 5,00,000
Taxable Leave salary Nil
(b) He is a non-government employee
Leave Salary received at the time of retirement ` 5,00,000
Less: Exempt under section 10(10AA) [See Note below] ` 26,400
Taxable Leave Salary ` 4,73,600
Note: Exemption under section 10(10AA) is least of the following:
(i) Leave salary received ` 5,00,000
(ii) Statutory limit ` 25,00,000

(iii) 10 months’ salary based on average salary of last 10 months
 Salary of last 10 months i.e. Feb. - Nov. 
i..e. 10x 
 10 months 

3.38 INCOME TAX LAW
 (5000×8)+(4000×2)+(60%×3000×10) 
= 10 ×  ` 66,000
 10 months 
(iv) Cash equivalent of leave standing at the credit of
the employee based on the average salary of last
10 months’ (max. 30 days per year of service)
Leave Due = Leave allowed – Leave taken
= ( 30 days per year × 20 years ) – 480 days= 120 days
i.e.  Leave due (in days) × Average salary p.m.

 
 30 days 
 120 days ` 66,000 
=  ×  ` 26,400
 30 days 10 
(7) Provident fund
Provident fund scheme is a scheme intended to give substantial benefits to an
employee at the time of his retirement. Under this scheme, a specified sum is
deducted from the salary of the employee each month or at regular intervals as his
contribution towards the fund. The employer also generally contributes the same
amount out of his pocket, to the fund. The contributions of the employer and the
employee are invested in approved securities. Interest earned thereon is also
credited to the account of the employee. Thus, the credit balance in a provident
fund account of an employee consists of the following:
(i) employee’s contribution
(ii) interest on employee’s contribution
(iii) employer’s contribution

(iv) interest on employer’s contribution.
The accumulated balance is paid to the employee at the time of his retirement or
resignation. In the case of death of the employee, the same is paid to his legal heirs.
The provident fund represents an important source of small savings available to
the Government. Hence, the Income-tax Act, 1961 gives certain deductions on
savings in a provident fund account.

SALARIES 3.39
Types of Provident Funds
Recognised Unrecognised Statutory

Public Provident
Provident Fund Provident Fund Provident Fund
Fund (PPF)
(RPF) (URPF) (SPF)
(i) Recognised Provident Fund (RPF): Recognised provident fund means a

provident fund recognised by the Commissioner of Income-tax for the
purposes of income-tax. It is governed by Part A of Schedule IV to the Income-
tax Act, 1961. This schedule contains various rules regarding the following:
(a) Recognition of the fund
(b) Employee’s and employer’s contribution to the fund
(c) Treatment of accumulated balance etc.
A fund constituted under the Employees’ Provident Fund and Miscellaneous

Provisions Act, 1952 will also be a Recognised Provident Fund.
(ii) Unrecognised Provident Fund (URPF): A fund not recognised by the

Commissioner of Income-tax is Unrecognised Provident Fund.
(iii) Statutory Provident Fund (SPF): The SPF is governed by Provident Funds
Act, 1925. It applies to employees of government, railways, semi-government
institutions, local bodies, universities and all recognised educational
institutions.
(iv) Public Provident Fund (PPF): Public provident fund is operated under the
Public Provident Fund Act, 1968. Membership of the fund is open to every
individual though it is ideally suited to self-employed people. A salaried employee
may also contribute to PPF in addition to the funds operated by his employer. An
individual may contribute to the fund on his own behalf or on behalf of a minor
of whom he is the guardian.
For getting a deduction under section 80C, a member is required to

contribute to the PPF a minimum of ` 500 in a year. The maximum amount
that may qualify for deduction on this account is ` 1,50,000 as per PPF rules.

3.40 INCOME TAX LAW
A member of PPF may deposit his contribution in as many installments in

multiples of ` 500 as is convenient to him. The amount of contribution may
be paid at any of the offices or branch offices of the State Bank of India or its
subsidiaries and specified branches of banks or any Post Office.
The tax treatment is given below:
During the Employment period
Particulars Recognised PF Unrecognised Statutory PF Public

PF PF
Employer’s Contribution in Not taxable at Fully exempt N.A.(as there
Contribution excess of 12% of the time of is only
salary is taxable as contribution assessee’s
“salary” u/s 17(1) own
contribution)
Employee’s Eligible for Not eligible for Eligible for Eligible for
Contribution deduction u/s deduction deduction u/s deduction
80C, where an 80C, where an u/s 80C,
employee employee where an
exercises the exercises the employee
option of shifting option of exercises the
out of the default shifting out of option of
tax regime the default tax shifting out
provided under regime of the default
section provided tax regime
115BAC(1A) under section provided
115BAC(1A) under section
115BAC(1A)
Interest Amount in excess Not taxable at Fully exempt N.A.
Credited on of 9.5% p.a. is the time of
Employer’s taxable as “salary” credit of
Contribution u/s 17(1) interest
Interest Amount in excess Not taxable at Exempt upto Fully exempt
Credited on of 9.5% p.a. is the time of certain limit of
Employee’s taxable as “salary” credit of contribution
Contribution u/s 17(1) [See interest [See Note
Note below] below]

SALARIES 3.41
Amount Exempt u/s 10(12) • Employee’s Exempt u/s Fully exempt

withdrawn subject to certain contribution 10(11) u/s 10(11)
on conditions is not
retirement/ detailed in the taxable.
termination chart below • Interest on
Employee’s
contribution
is taxable
under
‘Income from
Other
Sources’.
• Employer’s
contribution
and interest
thereon is
salary
Salary for this purpose means basic salary and dearness allowance, if provided in the
terms of employment for retirement benefits and commission as a percentage of
turnover.
Note - Interest credited on contribution by such person/employee
As per section 10(11), any payment from a Provident Fund (PF) to which Provident
Fund Act, 1925, applies or from Public Provident Fund would be exempt.
Accumulated balance due and becoming payable to an employee participating in

a Recognized Provident Fund (RPF) would be exempt under section 10(12).
However, the exemption under section 10(11) or 10(12) would not be available in
respect of income by way of interest accrued during the previous year to the extent
it relates to the amount or the aggregate of amounts of contribution made by that
person/employee exceeding ` 2,50,000 in any previous year in that fund, on or after
1st April, 2021.
If the contribution by such person/employee is in a fund in which there is no
employer’s contribution, then, a higher limit of ` 5,00,000 would be applicable for
such contribution, and interest accrued in any previous year in that fund, on or after
1st April, 2021 would be exempt upto that limit.

3.42 INCOME TAX LAW
It may be noted that interest accrued on contribution to such funds upto 31st
March, 2021 would be exempt without any limit, even if the accrual of income is
after that date.
Exemption under section 10(11) and 10(12) would be available to an assessee
The CBDT has, vide Rule 9D, notified the manner to calculate taxable interest
relating to contribution in a provident fund or recognized provident fund,
exceeding threshold limit.
Interest income accrued during the previous year which is not exempt from
inclusion in the total income of a person (taxable interest) shall be computed as the
interest accrued during the previous year in the taxable contribution account.
For this purpose, separate accounts within the provident fund account shall be
maintained during the previous year 2021-22 and all subsequent previous years for
taxable contribution and non-taxable contribution made by a person.
(a) Non-taxable contribution account – Aggregate of
(i) closing balance in the account as on 31.03.2021;
(ii) any contribution made by the person in the account during the
previous year 2021-22 and subsequent previous years, which is not
included in the taxable contribution account; and
(iii) interest accrued on (i) and (ii),
as reduced by the withdrawal, if any, from such account.
(b) Taxable contribution account – Aggregate of
(i) contribution made by the person in the account during the previous
year 2021-22 and subsequent previous years, which is in excess of the
yearly threshold limit; and
(ii) interest accrued on (i)
as reduced by the withdrawal, if any, from such account.
Yearly threshold limit is ` 5,00,000, if the contribution by such person/employee is

in a fund in which there is no employer’s contribution and ` 2,50,000 in other cases.

SALARIES 3.43
Exemption of Accumulated balance of RPF, payable to an employee
Has the employee rendered continuous service of at least

5 years with the employer?
YES NO
Are his services terminated due to (i) his ill-health (ii)

Exempt contraction or discontinuance of employer’s business or
(iii) any other cause beyond the control of the
employee?
Yes No
Exempt
Is the entire balance Is the entire balance

standing to the standing to the credit
credit of the No No of the employee
employee Taxable* transferred to his NPS
transferred to his account referred to in
individual account in section 80CCD and
any RPF maintained notified by the Central
with his new Government?
employer?
Yes
Yes
Exempt Exempt
* Where the accumulated balance in RPF becomes taxable, the tax payable in each of the
years would be computed as if the fund had been an URPF and the difference in tax would
be payable by the employee.
Note:
If, after termination of his employment with one employer, the employee obtains
employment under another employer, then, only so much of the accumulated balance
in his provident fund account will be exempt which is transferred to his individual

3.44 INCOME TAX LAW
account in a recognised provident fund maintained by the new employer. In such a

case, for exemption of payment of accumulated balance by the new employer, the
period of service with the former employer shall also be taken into account for
computing the period of five years’ continuous service.
ILLUSTRATION 6
Mr. A retires from service on December 31, 2024, after 25 years of service. Following are
the particulars of his income/investments for the previous year 2024-25:
Particulars `
Basic pay @ ` 16,000 per month for 9 months 1,44,000
Dearness pay (50% forms part of the retirement benefits) ` 8,000 per 72,000
month for 9 months
Lumpsum payment received from the Unrecognized Provident Fund 6,00,000
Deposits in the PPF account 40,000
Out of the amount received from the unrecognised provident fund, the employer’s
contribution was ` 2,20,000 and the interest thereon ` 50,000. The employee’s
contribution was ` 2,70,000 and the interest thereon ` 60,000. What is the taxable
portion of the amount received from the unrecognized provident fund in the hands of
Mr. A for the assessment year 2025-26?
SOLUTION
Taxable portion of the amount received from the URPF in the hands of Mr. A for
the A.Y. 2025-26 is computed hereunder:
Particulars `
Amount taxable under the head “Salaries”:
Employer’s share in the payment received from the URPF 2,20,000
Interest on the employer’s share 50,000
Total 2,70,000
Amount taxable under the head “Income from Other Sources”:
Interest on the employee’s share 60,000
Total amount taxable from the amount received from the fund 3,30,000
Note: Since the employee is not eligible for deduction under section 80C for contribution
to URPF at the time of such contribution, the employee’s share received from the URPF

SALARIES 3.45
is not taxable at the time of withdrawal as this amount has already been taxed as his
salary income.
ILLUSTRATION 7
Will your answer be any different if the fund mentioned above was a recognised
provident fund?
SOLUTION
Since the fund is a recognised one, and the maturity is taking place after a service
of 25 years, the entire amount received on the maturity of the RPF will be fully
exempt from tax.
ILLUSTRATION 8
Mr. B is working in XYZ Ltd. and has given the details of his income for the P.Y. 2024-25.
You are required to compute his gross salary from the details given below:
Basic Salary ` 10,000 p.m.
D.A. (50% is for retirement benefits) ` 8,000 p.m.
Commission as a percentage of turnover 0.1%
Turnover during the year ` 50,00,000
Bonus ` 40,000
Gratuity ` 25,000
His own contribution in the RPF ` 20,000
Employer’s contribution to RPF 20% of his basic salary
Interest accrued in the RPF @ 13% p.a. ` 13,000

SOLUTION
Computation of Gross Salary of Mr. B for the A.Y.2025-26
Particulars ` `
Basic Salary [ ` 10,000 × 12] 1,20,000
Dearness Allowance [` 8,000 × 12] 96,000
Commission on turnover [0.1% × ` 50,00,000] 5,000
Bonus 40,000
Gratuity [Note 1] 25,000

3.46 INCOME TAX LAW
Employer’s contribution to RPF [20% of ` 1,20,000] 24,000

Less: Exempt [Note 2] 20,760 3,240
Interest accrued in the RPF@13% p.a. 13,000

Less: Exempt@9.5% p.a. 9,500 3,500
Gross Salary 2,92,740
Notes:
1. Gratuity received during service is fully taxable.
2. Employers’ contribution in the RPF is exempt up to 12% of the salary i.e., 12%
of [Basic Salary + Dearness Allowance forming part of retirement benefits +
Commission based on turnover] = 12% of [` 1,20,000 + (50% × ` 96,000) +
` 5,000] = 12% of ` 1,73,000 = ` 20,760
3. Employee’s contribution to RPF is not taxable. It is eligible for deduction
under section 80C, if he exercises the option of shifting out of the default tax
regime provided under section 115BAC(1A).
(8) The contribution made by the Central Government or any other
employer in the previous year to the account of an employee under a
pension scheme referred to in section 80CCD
National Pension scheme is a scheme approved by the Government for Indian
citizen aged between 18-70 years. Subscribers of the NPS account contributes
some amount in their account. In case of any employee, being a subscriber of the
NPS account, employer may also contribute into the employee’s account.
Employer’s contribution to NPS account would form part of salary of employees
under section 17(1).
However, while computing total income of the employee-assessee, a deduction
under section 80CCD is allowed to the assessee in respect of the employer’s as well
as employee’s contribution under a pension scheme referred therein. (Deduction
under section 80CCD will be discussed in detail in Chapter 6 – “Deductions from
Gross Total Income”)

SALARIES 3.47
Deduction under section 80CCD(2) in respect of employer’s

contribution would be available to an assessee irrespective of the
regime under which he pays tax. However, deduction under section
80CCD(1)/(1B) in respect of employee’s contribution would be available to an
assessee only if he exercises the option of shifting out of the default tax regime
provided under section 115BAC(1A).
(9) The contribution made by the Central Government in the previous
year, to the Agniveer Corpus Fund account of an individual enrolled in
the Agnipath Scheme referred to in section 80CCH.
Agnipath Scheme is a Central Government Scheme launched in 2022 for enrolment
of Indian youth in the Indian Armed Forces as Agniveers for four years to serve the
country.
In pursuance of the Government's decision to implement the Agnipath Scheme,
2022, the Competent Authority has decided to create a non-lapsable dedicated
Agniveer Corpus Fund in the interest-bearing section of the Public Account head.
In this account, fixed percentage of monthly emoluments would be contributed by
the Agniveer and matching amount would be contributed by the Central
Government.
The Agniveer Corpus Fund is defined as a Fund in which consolidated contributions
of all the Agniveers and matching contributions of the Government along with
interest on these contributions would be held in their respective accounts.
Central Government’s contribution to Agniveer Corpus Fund account would form
part of salary of employees under section 17(1).
However, while computing total income of an individual enrolled in the Agnipath
Scheme, being the assessee, a deduction under section 80CCH is allowed to the
assessee in respect of his contribution as well as Central Government’s contribution
under Agniveer Corpus Fund referred therein. (Deduction under section 80CCH will
be discussed in detail in Chapter 6 – “Deductions from Gross Total Income”)
Deduction under section 80CCH(2) in respect of Central Government’s
contribution would be available to an assessee irrespective of the regime
under which he pays tax. However, deduction under section 80CCH(1) in
respect of employee’s contribution would be available to an assessee only if he
exercises the option of shifting out of the default tax regime provided under section
115BAC(1A).

3.48 INCOME TAX LAW
1.3.2 Profits in lieu of salary [Section 17(3)]

It includes the following:
(i) Compensation on account of termination of his employment
The amount of 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.
(ii) Compensation on account of modification of the terms and conditions
of employment
The amount of any compensation due to or received by an assessee from his
employer or former employer at or in connection with the modification of the
terms and conditions of employment.
Usually, such compensation is treated as a capital receipt. However, by virtue of
this provision, the same is treated as a revenue receipt and is chargeable as salary.
Note: It is to be noted that merely because a payment is made by an employer
to a person who is his employee does not automatically fall within the scope of
the above provisions. The payment must be arising due to master-servant
relationship between the payer and the payee. If it is not on that account, but
due to considerations totally unconnected with employment, such payment is
not profit in lieu of salary.
(iii) Payment from provident fund or other fund
Any payment due to or received by an assessee from his employer or former
employer from a provident or other fund other than
- Gratuity [Section 10(10)]
- Pension [Section 10(10A)]
- Compensation received by a workman under Industrial Disputes Act, 1947
[Section 10(10B)]
- from provident fund or public provident fund [Section 10(11)]
- from recognized provident fund [Section 10(12)]
- from approved superannuation fund [Section 10(13)]
- any House Rent Allowance [Section 10(13A)],
to the extent to which it does not consist of employee’s contributions or interest
on such contributions.
Note: If any sum is paid to an employee at the time of maturity from an
unrecognised provident fund it is to be dealt with as follows:
(a) that part of the sum which represents the employer’s contribution to the fund
and interest thereon is taxable under the head “Salaries”.

SALARIES 3.49
(b) that part of the sum which represents employee’s contribution is not chargeable
to tax as no deduction or exemption was available at the time of contribution.
(c) that part of the sum which represents the interest on employee’s contribution
is chargeable to tax as ‘Income from other sources’.
(iv) Keyman Insurance policy
Any sum received by an assessee under a Key man Insurance policy including
the sum allocated by way of bonus on such policy.
(v) Lump sum Payment or otherwise
Any amount, whether in lump sum or otherwise, due to the assessee or received
by him, from any person -
(a) before joining employment with that person, or
(b) after cessation of his employment with that person.
(1) Retrenchment compensation [Section 10(10B)]

The retrenchment compensation means the compensation paid under Industrial
Disputes Act, 1947 or under any Act, Rule, Order or Notification issued under any
law. It also includes compensation paid on transfer of employment under section
25F or closing down of an undertaking under section 25FF of the Industrial Disputes
Act, 1947.
It may be noted that compensation on account of termination and due to
modification in terms and conditions of employment would be taxable as “profits
in lieu of salary”. However, the retrenchment compensation would be exempt under
section 10(10B), subject to following limits.
(a) Amount calculated in accordance with the provisions of section 25F of the
Industrial Disputes Act, 1947
i.e., 15 days average pay x completed years of service and part thereof in
excess of 6 months
(or)
(b) An amount, not less than ` 5,00,000 as may be notified by the Central
Government in this behalf,
whichever is lower.

3.50 INCOME TAX LAW
Notes:
1. The above limits will not be applicable to cases where the compensation is paid under
any scheme approved by the Central Government for giving special protection to
workmen under certain circumstances.
2. Average pay means average of the wages payable to a workman

- in the case of monthly paid workman, in the three complete calendar months,
- in the case of weekly paid workman, in the four calendar weeks,
- in the case of daily paid workman, in the twelve full working weeks,
preceding the date on which the average pay becomes payable if the workman had
worked for three complete calendar months or four complete weeks or twelve full
working days, as the case may be, and where such calculation cannot be made, the
average pay shall be calculated as the average of the wages payable to a workman
during the period he actually worked.
3. Wages for this purpose means all remuneration capable of being expressed in terms
of money, which would, if the terms of employment, expressed or implied, were
fulfilled, be payable to a workman in respect of his employment or of work done in
such employment, and includes
- such allowances including DA as the workman is for the time being entitled to;
- the value of any house accommodation, or of supply of light, water, medical
attendance or other amenity or of any other service or of any concessional supply
of food grains or other articles;
- any travel concession; and
- any commission payable on the promotion of sales or business or both

However, it does not include
- any bonus;
- contribution to a retirement benefit scheme;

- any gratuity payable on the termination of his service.
4. Exemption under section 10(10B) would be available to an assessee irrespective of
the regime under which he pays tax.

SALARIES 3.51
(2) Voluntary Retirement Receipts [Section 10(10C)]

Lump sum payment or otherwise received by an employee at the time of voluntary
retirement would be taxable as “profits in lieu of salary”. However, it would be
exempt under section 10(10C), subject to the following conditions:
Eligible Undertakings - The employees of the following undertakings are eligible

for exemption under this clause:
(i) Public sector company
(ii) Any other company
(iii) An authority established under a Central/State or Provincial Act
(iv) A local authority
(v) A co-operative society
(vi) An University established or incorporated under a Central/State or Provincial

Act and an Institution declared to be an University by the University Grants
Commission
(vii) An Indian Institute of Technology
(viii) Such Institute of Management as the Central Government may, by notification

in the Official Gazette, specify in this behalf
(ix) Any State Government
(x) The Central Government
(xi) An institution, having importance throughout India or in any State or States,

as the Central Government may specify by notification in the Official Gazette.
Limit: The maximum limit of exemption should not exceed ` 5 lakh.
Such compensation should be at the time of his voluntary retirement or termination

of his service, in accordance with any scheme or schemes of voluntary retirement
or, in the case of public sector company, a scheme of voluntary separation. The
exemption will be available even if such compensation is received in installments.

3.52 INCOME TAX LAW
Guidelines:
The schemes should be framed in accordance with such guidelines, as may be
prescribed and should include the criteria of economic viability.
Rule 2BA prescribes that the exemption under this section would be available to an
employee who has completed 10 years of service or completed 40 years of age.
However, this requirement is not applicable in case of an employee of a public
sector company under the scheme of voluntary separation framed by the company.
The amount receivable on account of voluntary retirement or separation of the
employee must not exceed -
- the amount equivalent to three months’ salary for each completed year of
service or
- salary at the time of retirement multiplied by the balance months of service
left before the date of his retirement or superannuation.
• Where any relief has been allowed to any assessee u/s 89 for any
A.Y. in respect of any amount received or receivable on his voluntary
retirement or termination of service or voluntary separation, no
exemption u/s 10(10C) shall be allowed to him in relation to that A.Y. or any
other A.Y.
• Where exemption for voluntary retirement compensation under section
10(10C) has been allowed in any A.Y., then no exemption thereunder shall be
allowed to him in any other A.Y.
• “Salary” for this purpose means basic salary and dearness allowance, if
provided in the terms of employment for retirement benefits, forming part of
salary and commission which is expressed as a fixed percentage of turnover.
• Exemption under section 10(10C) would be available to an assessee
ILLUSTRATION 9
Mr. Dutta received voluntary retirement compensation of ` 7,00,000 after 30 years 4
months of service. He still has 6 years of service left. At the time of voluntary
retirement, he was drawing basic salary ` 20,000 p.m.; Dearness allowance (which
forms part of pay) ` 5,000 p.m. Compute his taxable voluntary retirement
compensation, assuming that he does not claim any relief under section 89.

SALARIES 3.53
SOLUTION
Voluntary retirement compensation received ` 7,00,000
Less: Exemption under section 10(10C) [See Note below] ` 5,00,000

Taxable voluntary retirement compensation ` 2,00,000
Note: Exemption is to the extent of least of the following:
(i) Compensation actually received = ` 7,00,000

(ii) Statutory limit = ` 5,00,000
(iii) 3 months’ salary × completed years of service
= (` 20,000 + ` 5,000) × 3 × 30 years = ` 22,50,000
(iv) Last drawn salary × remaining months of service left
= (` 20,000 + ` 5,000) × 6 × 12 months = ` 18,00,000
1.3.3 Perquisites
The term ‘perquisite’ indicates some extra benefit in addition to the amount that
may be legally due by way of contract for services rendered. In modern times, the
salary package of an employee normally includes monetary salary and perquisites
like housing, car etc.
• Perquisite may be provided in cash or in kind.
• Reimbursement of expenses incurred in the official discharge of duties is not a
perquisite.
• Perquisite may arise in the course of employment or in the course of profession.
If it arises from a relationship of employer-employee, then the value of the
perquisite is taxable as salary. However, if it arises during the course of
profession, the value of such perquisite is chargeable as profits and gains of
business or profession.
• Perquisite will become taxable only if it has a legal origin. An unauthorised
advantage taken by an employee without his employer’s sanction cannot be
considered as a perquisite under the Act.
Example: Mr. A, an employee, is given a house by his employer. On 31.3.2025,

he is terminated from service, but he continues to occupy the house without the
permission of the employer for six more months after which he is evicted by the

3.54 INCOME TAX LAW
employer. The question arises whether the value of the benefit enjoyed by him
during the six-month period can be considered as a perquisite and be charged
to salary. It cannot be done since the relationship of employer-employee ceased
to exist after 31.3.2025. However, the definition of income is wide enough to
bring the value of the benefit enjoyed by Mr. A to tax as “Income from other
sources”.
(1) Definition of “Perquisite”
The term “perquisite” is defined under section 17(2). The definition of perquisite is
an inclusive one. Based on the definition, perquisites can be classified in following
three ways:
Types of Perquisites
Perquisites taxable only in

Perquisites taxable in the Tax free perquisites in
the hands of specified
case of all employees case of all employees
employees
(A) Perquisites taxable in the case of all employees

The following perquisites are chargeable to tax in case of all employees:
Rent Free Value of rent-free accommodation provided to the

Accommodation assessee by his employer computed in prescribed
manner [Section 17(2)(i)]. [Refer discussion on
valuation of perquisite]
Exception: Rent-free official residence provided to a Judge of a High Court or to a
Judge of the Supreme Court is not taxable if they exercise the option of shifting out of
the default tax regime provided under section 115BAC(1A).
Concession in rent Value of any accommodation provided to the
assessee by his employer at a concessional rate.
Accommodation would be deemed to have been
provided at a concessional rate, if the value of
accommodation computed in the prescribed manner
exceeds the rent recoverable from, or payable by, the
assessee [Section 17(2)(ii)].

SALARIES 3.55
Payment by the employer Amount paid by an employer in respect of any

in respect of an obligation which otherwise would have been payable
obligation of employee by the employee [Section 17(2)(iv)].
Example: If a domestic servant is engaged by an employee and the employer
reimburses the salary paid to the servant, it becomes an obligation which the
employee would have discharged even if the employer did not reimburse the same.
This perquisite will be covered by section 17(2)(iv) and will be taxable in the hands
of all employees.
Amount payable by an Amount payable by an employer directly or indirectly
employer directly or to effect an assurance on the life of the assessee or to
indirectly to effect an effect a contract for an annuity, other than payment
assurance on the life of made to RPF or approved superannuation fund or
the assessee deposit-linked insurance fund established under the
Coal Mines Provident Fund and Miscellaneous
Provisions Act, 1948 or Employees’ Provident Fund
and Miscellaneous Provisions Act, 1952 [Section
17(2)(v)].
However, there are schemes like group annuity
scheme, employees state insurance scheme and fidelity
insurance scheme, under which insurance premium is
paid by employer on behalf of the employees. Such
payments are not regarded as perquisite in view of the
fact that the employees have only an expectancy of the
benefit in such schemes.
Specified security or The value of any specified security or sweat equity shares
sweat equity shares allotted or transferred, directly or indirectly, by the
allotted or transferred, by employer or former employer, free of cost or at
the employer concessional rate to the assessee [Section 17(2)(vi)]
[Refer discussion on valuation of perquisite].
Amount or the aggregate The amount or aggregate of amounts of any
of amounts of any contribution made
contribution made to the - in a recognised provident fund
account of the assessee - in NPS referred to in section 80CCD(1)
by employer - in an approved superannuation fund
- in a recognised by the employer to the account of the assessee, to
provident fund the extent it exceeds ` 7,50,000 [Section 17(2)(vii)].
- in NPS
- in an approved
superannuation fund

3.56 INCOME TAX LAW
Annual accretion to the Refer discussion below

balance at the credit of
the recognised provident
fund/NPS/approved
superannuation fund
which relates to the
employer’s contribution
and included in total
income (on account of
the same having
exceeded ` 7,50,000)
Any other fringe benefit The value of any other fringe benefit or amenity as
or amenity may be prescribed by the CBDT [Section 17(2)(viii)].
Rule 3(7) prescribed the following other benefits or
amenity taxable in case of all employees.
- Interest free or concessional loan
- Travelling, touring and accommodation
- Free or concessional food and non-alcoholic
beverages
- Gift, voucher or token in lieu of such gift
- Credit card expense
- Club expenditure
- Use of movable assets
- Transfer of movable assets
- Other benefit or amenity [For valuation, refer
discussion on valuation of perquisite]
Annual accretion to the balance at the credit of the recognised provident
fund/NPS/approved superannuation fund which relates to the employer’s
contribution and included in total income (on account of the same having
exceeded ` 7,50,000)
Any annual accretion by way of interest, dividend or any other amount of similar
nature during the previous year to the balance at the credit of the recognized
provident fund or NPS or approved superannuation fund to the extent it relates to
the employer’s contribution which is included in total income in any previous year
under section 17(2)(vii) computed in prescribed manner [Section 17(2)(viia)].

SALARIES 3.57
In other words, interest, dividend or any other amount of similar nature on the
amount which is included in total income under section 17(2)(vii) would also be
treated as a perquisite.
The CBDT has, vide Rule 3B, notified the following manner to compute the annual
accretion by way of interest, dividend or any other amount of similar nature during
the previous year-
TP = (PC/2)*R + (PC1 + TP1)*R
Where,
TP Taxable perquisite under section 17(2)(viia) for the current P.Y.

PC Amount or aggregate of amounts of employer’s contribution in excess
of ` 7.5 lakh to recognized provident fund, national pension scheme u/s
80CCD and approved superannuation fund during the P.Y.
PC1 Amount or aggregate of amounts of employer’s contribution in excess
of ` 7.5 lakh to recognized provident fund, national pension scheme u/s
80CCD and approved superannuation fund for the previous year or
years commencing on or after 1stApril, 2020 other than the current P.Y.
TP1 Aggregate of taxable perquisite under section 17(2)(viia) for the previous
year or years commencing on or after 1stApril, 2020 other than the current
P.Y.
R I/ Favg
I Amount or aggregate of amounts of income accrued during the current
P.Y. in recognized provident fund, national pension scheme u/s 80CCD
and approved superannuation fund
Favg (Amount or aggregate of amounts of balance to the credit of
recognized provident fund, national pension scheme u/s 80CCD and
approved superannuation fund on first day of the current P.Y. + Amount
or aggregate of amounts of balance to the credit of recognized
provident fund, national pension scheme u/s 80CCD and approved
superannuation fund on last day of the current P.Y.)/2
Where the amount or aggregate of amounts of TP1 and PC1 exceeds the amount
or aggregate of amounts of balance to the credit of the specified fund or scheme
on the first day of the current previous year, then, the amount in excess of the
amount or aggregate of amounts of the said balance shall be ignored for the
purpose of computing the amount or aggregate of amounts of TP1 and PC1.

3.58 INCOME TAX LAW
ILLUSTRATION 10
Mr. X is appointed as a CFO of ABC Ltd. in Mumbai from 1.9.2022. His basic salary is
` 6,00,000 p.m. He is paid 8% as D.A. He contributes 10% of his pay and D.A. towards
his recognized provident fund and the company contributes the same amount. The
accumulated balance in recognized provident fund as on 1.4.2023, 31.3.2024 and
31.3.2025 is ` 9,81,137, ` 27,43,048 and ` 46,48,555, respectively. Compute the
perquisite value chargeable to tax in the hands of Mr. X u/s 17(2)(vii) and 17(2)(viia)
for the A.Y. 2024-25 and A.Y. 2025-26. Prior to 1.9.2022, he was a consultant, whose
professional fees was taxable under the head “Profits and gains of business or
profession”.
SOLUTION
Computation of perquisite value taxable u/s 17(2)(vii) and 17(2)(viia) for
A.Y. 2024-25
1. Perquisite value taxable u/s 17(2)(vii) = ` 7,77,600, being employer’s
contribution to recognized provident fund during the P.Y. 2023-24 –
` 7,50,000 = ` 27,600
2. Perquisite value taxable u/s 17(2)(viia) =Annual accretion on perquisite
taxable u/s 17(2)(vii) = (PC/2)*R + (PC1 + TP1)*R
= (27,600/2) x 0.111 + 0
= ` 1,532
PC ABC Ltd.’s contribution in excess of ` 7.5 lakh to recognized provident
fund during P.Y. 2023-24 = ` 27,600
PC1 Nil since employer’s contribution is less than ` 7.5 lakh to recognized
provident fund in P.Y. 2022-23 and there is no employer’s
contribution in P.Y. 2020-21 and P.Y. 2021-22.
TP1 Nil
R I/Favg = 2,06,711/18,62,093 = 0.111

I RPF balance as on 31.3.2024 – employee’s and employer’s
contribution during the year – RPF balance as on 1.4.2023 =
` 2,06,711 (` 27,43,048 – ` 7,77,600 – ` 7,77,600 – ` 9,81,137)

SALARIES 3.59
Favg Balance to the credit of recognized provident fund as on 1st April,

2023 + Balance to the credit of recognized provident fund as on 31 st
March, 2024)/2 = (` 9,81,137 + ` 27,43,048)/2 = ` 18,62,093
Note – Interest on the aggregate of following will also be chargeable to tax during
A.Y. 2024-25 –
(i) ` 2,03,600 [Employee’s contribution exceeding ` 2,50,000 during P.Y. 2022-23]

(ii) ` 5,27,600 [Employee’s contribution exceeding ` 2,50,000 during P.Y. 2023-24]
(iii) interest accrued on ` 2,03,600 being excess employee’s contribution of
P.Y. 2022-23
Computation of perquisite value taxable u/s 17(2)(vii) and 17(2)(viia)
for A.Y. 2025-26
1. Perquisite value taxable u/s 17(2)(vii) = ` 7,77,600, being employer’s
contribution to recognized provident fund during the P.Y. 2024-25 –
` 7,50,000 = ` 27,600
2. Perquisite value taxable u/s 17(2)(viia) = Annual accretion on perquisite
taxable u/s 17(2)(vii) = (PC/2)*R + (PC1 + TP1)*R
= (27,600/2) x 0.09479 + (27,600 + 1,532) x 0.09479
= ` 1,308 + ` 2,761 = ` 4,069
PC ABC Ltd.’s contribution in excess of ` 7.5 lakh to recognized
provident fund during P.Y. 2024-25 = ` 27,600
PC1 Amount of employer’s contribution in excess of ` 7,50,000 to RPF in
P.Y. 2020-21, P.Y. 2021-22 and P.Y. 2022-23 = ` 27,600
TP1 Taxable perquisite under section 17(2)(viia) for the P.Y. 2023-24 =
` 1,532
R I/Favg = 3,50,307/36,95,802 = 0.09479
I RPF balance as on 31.3.2025 – employee’s and employer’s
contribution during the year – RPF balance as on 1.4.2024 =
` 3,50,307 (` 46,48,555 – ` 7,77,600 – ` 7,77,600 – ` 27,43,048)
Favg Balance to the credit of recognized provident fund as on 1st April,
2024 + Balance to the credit of recognized provident fund as on 31st
March, 2025)/2 = (` 27,43,048 + ` 46,48,555)/2 = ` 36,95,802

3.60 INCOME TAX LAW
Note – Interest on the aggregate of following will also be chargeable to tax during
A.Y. 2025-26 –
(i) ` 2,03,600 [Employee’s contribution exceeding ` 2,50,000 during P.Y. 2022-23]
(ii) ` 5,27,600 [Employee’s contribution exceeding ` 2,50,000 during P.Y. 2023-24]
(iii) ` 5,27,600 [Employee’s contribution exceeding ` 2,50,000 during P.Y. 2024-25]
(iv) interest accrued on ` 2,03,600 being excess employee’s contribution of P.Y. 2022-23
(v) interest accrued on ` 5,27,600 being excess employee’s contribution of
P.Y. 2023-24
Exemption in respect of payment from superannuation funds [Section 10(13)]
Any payment received by any employee from an approved superannuation fund
shall be entirely excluded from his total income if the payment is made
(a) on the death of a beneficiary;
(b) to an employee in lieu or in commutation of an annuity on his retirement at or after
a specified age or on his becoming incapacitated prior to such retirement; or
(c) by way of refund of contribution on the death of a beneficiary; or
(d) by way of contribution to an employee on his leaving the service in
connection with which the fund is established otherwise than by retirement
at or after a specified age or his becoming incapacitated prior to such
retirement, to the extent the payment made does not exceed the contribution
made prior to 1-4-1962 and the interest thereon.
(e) by way of transfer to the account of the employee under a pension scheme
referred to in section 80CCD, which is notified by the Central Government.
(B) Tax free perquisites in all cases
The following perquisites are exempt from tax in the hands of all employees.
Telephone Telephone provided by an employer to an employee

at his residence
Transport Facility Transport facility provided by an employer, being
airline or the railways for the purpose of transport of
passengers or goods to his employees of an either
free of charge or at concessional rate;
Perquisites allowed Perquisites allowed outside India by the Government
outside India by the to a citizen of India for rendering services outside
Government India;

SALARIES 3.61
Employer’s Employer’s contribution to staff group insurance

contribution to staff scheme;
group insurance
scheme;
Annual premium by Payment of annual premium by employer on personal
employer on personal accident policy effected by him on the life of the
accident policy employee;
Refreshment Refreshment provided to all employees during
working hours in office premises;
Subsidized lunch Subsidized lunch provided to an employee during
working hours at office or business premises provided
the value of such meal is upto ` 50; This exemption is
available only if the employee exercises the option of
shifting out of the default tax regime provided under
section 115BAC(1A).
Recreational facilities Recreational facilities, including club facilities,
extended to employees in general i.e., not restricted
to a few select employees;
Amount spent on Amount spent by the employer on training of
training of employees employees or amount paid for refresher management
course including expenses on boarding and lodging;
Sum payable by Sum payable by an employer to a RPF or an approved
employer to a RPF or superannuation fund or deposit-linked insurance fund
an approved established under the Coal Mines Provident Fund and
superannuation fund Miscellaneous provisions Act, 1948 or the Employees’
Provident Fund and Miscellaneous Provisions Act,
1952 upto the limit prescribed;
Leave travel Leave travel concession if the assessee exercises the
concession option of shifting out of the default tax regime provided
under section 115BAC(1A), subject to the conditions
specified under section 10 (discussed below)
Note: Value of Leave travel concession provided to the High Court judge or the
Supreme Court Judge and members of his family are completely exempt without
any conditions if they exercise the option of shifting out of the default tax regime
Medical facilities Medical facilities subject to certain prescribed limits

[Refer proviso to section 17(2)];

3.62 INCOME TAX LAW
Rent-free official Rent-free official residence provided to a Judge of a

residence High Court or the Supreme Court if they exercise the
option of shifting out of the default tax regime
provided under section 115BAC(1A);
Conveyance facility Conveyance facility provided to High Court Judges
under section 22B of the High Court Judges
(Conditions of Service) Act, 1954 and Supreme Court
Judges under section 23A of the Supreme Court
Judges (Conditions of Service) Act, 1958 if they
exercise the option of shifting out of the default tax
Exemption in respect of Leave travel concession [Section 10(5)]

(i) This clause exempts the leave travel concession (LTC) received by employees
from their employers for proceeding to any place in India,
(a) either on leave or
(b) after retirement from service or

(c) after termination of his service.
Exemption under this section would be available only to employees exercising the
option of shifting out of the default tax regime provided under section
115BAC(1A). It is not available under the default tax regime under section 115BAC.
(ii) The benefit is available to individuals - citizens as well as non-citizens - in
respect of travel concession or assistance for himself or herself and for his/her
family- i.e., spouse and children of the individual and parents, brothers and
sisters of the individual or any of them wholly or mainly dependent on the
individual.
(iii) Limit of exemption- The exemption in all cases will be limited to the amount
actually spent subject to such conditions as specified in Rule 2B regarding the
ceiling on the number of journeys for the place of destination.
Under Rule 2B, exemption will be available in respect of 2 journeys performed
in a block of 4 calendar years commencing from the calendar year 1986.
Where such travel concession or assistance is not availed by the individual
during any block of 4 calendar years, one such unavailed LTC will be carried
forward to the immediately succeeding block of 4 calendar years and will be
eligible for exemption.

SALARIES 3.63
Example:
An employee does not avail any LTC for the block 2018-21. He is allowed to
carry forward maximum one unavailed LTC to be used in the succeeding block
of 2022-25. Accordingly, if he avails LTC in April 2024, the same will be treated
as having availed in respect of the block 2018-2021. Therefore, he will be
eligible for exemption in respect of that journey and two more journeys can be
further availed in respect of the block of 2022-25.
(iv) Monetary limits - Where the journey is performed on or after the 1.10.1997, the
amount exempted under section 10(5) in respect of the value of LTC shall be the
amount actually incurred on such travel subject to the following conditions:
S.No. Journey performed by Limit
1 Air Amount not exceeding the air economy
fare of the National Carrier by the
shortest route to the place of
destination.
2 Any other mode:
(i) Where rail service is Amount not exceeding the air-
available conditioned first class rail fare by the
shortest route to the place of destination
(ii) Where rail service is
not available
(a) a recognised amount not exceeding the 1st class or
public transport deluxe class fare, as the case may be, on
system exists such transport by the shortest route to
the place of destination
(b) no recognised amount equivalent to the air-
public transport conditioned first class rail fare, for the
system exists distance of the journey by the shortest
route, as if the journey had been
performed by rail
Note: The exemption referred to shall not be available to more than two
surviving children of an individual after 1.10.1998. This restrictive sub-rule
shall not apply in respect of children born before 1.10.1998 and also in case
of multiple births after one child.
Exemption in respect of leave travel concession under section 10(5) would
be available to an assessee only if he exercises the option of shifting out of

3.64 INCOME TAX LAW
ILLUSTRATION 11
Mr. D went on a holiday on 25.12.2024 to Delhi with his wife and three children (one son
– age 5 years; twin daughters – age 3 years). They went by flight (economy class) and
the total cost of tickets reimbursed by his employer was ` 60,000 (` 45,000 for adults and
` 15,000 for the three minor children). Compute the amount of LTC exempt if Mr. D
exercises the option of shifting out of the default tax regime provided under section
115BAC(1A).
SOLUTION
Since the son’s age is more than the twin daughters, Mr. D can avail exemption for
all his three children. The restriction of two children is not applicable to multiple
births after one child. The holiday being in India and the journey being performed
by air (economy class), the entire reimbursement met by the employer is fully
exempt in the hands of Mr. D, since he is exercising the option of shifting out of
ILLUSTRATION 12
In the above illustration 11, will there be any difference if among his three children the
twins were 5 years old and the son 3 years old? Discuss.
SOLUTION
Since the twins’ age is more than the son, Mr. D cannot avail for exemption for all his
three children. LTC exemption can be availed in respect of only two children. Taxable
1
LTC = 15,000 × = ` 5,000.
3
LTC exempt would be only ` 55,000 (i.e. ` 60,000 – ` 5,000)
Medical facilities [Proviso to section 17(2)]
The following medical facilities are exempt from tax:
(i) Value of medical treatment in any hospital maintained by the employer:
The value of any medical treatment provided to an employee or any member
of his family in any hospital maintained by the employer;
(ii) Reimbursement of expenditure actually incurred on medical treatment:
Any sum paid by the employer in respect of any expenditure actually incurred
by the employee on his medical treatment or treatment of any member of his
family

SALARIES 3.65
• in any hospital maintained by the Government/local authority/any

other hospital approved by the Government for the purpose of medical
treatment of its employees;
• in respect of the prescribed disease or ailments in any hospital
approved by the Principal Chief Commissioner or Chief Commissioner
having regard to the prescribed guidelines.
• in respect of any illness relating to COVID-19 subject to conditions
notified by the Central Government
Accordingly, the Central Government has, vide Notification No. 90/2022
dated 5.8.2022, specified that for claiming benefit of such exemption, the
employee has to submit the following documents to the employer, –
(a) the COVID-19 positive report of the employee or family member,
or medical report if clinically determined to be COVID-19 positive
through investigations, in a hospital or an in-patient facility by a
treating physician of a person so admitted;
(b) all necessary documents of medical diagnosis or treatment of the
employee or his family member for COVID-19 or illness related to
COVID-19 suffered within 6 months from the date of being
determined as COVID-19 positive; and
(c) a certification in respect of all expenditure incurred on the
treatment of COVID-19 or illness related to COVID-19 of the
employee or of any member of his family.
(iii) Premium paid to effect an insurance on the health of employee: Any
premium paid by an employer in relation to an employee to effect an
insurance on the health of such employee. However, any such scheme should
be approved by the Central Government or the Insurance Regulatory
Development Authority (IRDA) for the purposes of section 36(1)(ib).
(iv) Reimbursement of premium paid to effect an insurance on the health of
employee or for the family of an employee: Any sum paid by the employer
in respect of any premium paid by the employee to effect an insurance on his
health or the health of any member of his family under any scheme approved
by the Central Government or the Insurance Regulatory Development
Authority (IRDA)for the purposes of section 80D.

3.66 INCOME TAX LAW
(v) Amount paid towards expenditure incurred outside India on medical

treatment: Any expenditure incurred by the employer or any sum paid by the
employer on any expenditure actually incurred by the employee on the
following:
(a) medical treatment of the employee or any member of the family of
such employee outside India;
(b) travel and stay abroad of the employee or any member of the family
of such employee for medical treatment;
(c) travel and stay abroad of one attendant who accompanies the
patient in connection with such treatment.
Conditions:
1. The perquisite element in respect of expenditure on medical treatment
and stay abroad will be exempt only to the extent permitted by the RBI.
2. The expenses in respect of traveling of the patient and the attendant
will be exempt if the employee’s gross total income as computed before
including the said expenditure does not exceed ` 2 lakh.
Note: For this purpose, family means spouse and children of the individual.
Children may be dependent or independent, married or unmarried. It also includes
parents, brothers and sisters of the individual if they are wholly or mainly
dependent upon him. Hospital includes a dispensary or a clinic or a nursing home.
ILLUSTRATION 13
Compute the taxable value of the perquisite in respect of medical facilities received by
Mr. G from his employer during the P.Y. 2024-25:
Medical premium paid for insuring health of Mr. G ` 7,000

Treatment of Mr. G by his family doctor ` 5,000
Treatment of Mrs. G in a Government hospital ` 25,000
Treatment of Mr. G’s grandfather in a private clinic ` 12,000
Treatment of Mr. G’s mother (68 years and dependant) by family doctor ` 8,000
Treatment of Mr. G’s sister (dependant) in a nursing home ` 3,000
Treatment of Mr. G’s brother (independent) ` 6,000

SALARIES 3.67
Treatment of Mr. G’s father (75 years and dependent) abroad ` 50,000
Expenses of staying abroad of the patient ` 30,000
Limit specified by RBI ` 75,000
SOLUTION
Computation of taxable value of perquisite in the hands of Mr. G
Particulars ` `
Treatment of Mrs. G in a Government hospital -
Treatment of Mr. G’s father (75 years and dependent) abroad 50,000
Expenses of staying abroad of the patient and attendant 30,000
80,000
Less: Exempt up to limit specified by RBI 75,000 5,000
Medical premium paid for insuring health of Mr. G -
Treatment of Mr. G by his family doctor 5,000
Treatment of Mr. G’s mother (dependent) by family doctor 8,000
Treatment of Mr. G’s sister (dependent) in a nursing home 3,000
Treatment of Mr. G’s grandfather in a private clinic 12,000
Treatment of Mr. G’s brother (independent) 6,000
Taxable value of perquisite 39,000
Payment of premium on personal accident insurance policies

If an employer takes personal accident insurance policies on the life of employees
and pays the insurance premium, no immediate benefit would become payable and
benefit will accrue at a future date only if certain events take place.
Moreover, the employers would be taking such policy in their business interest only,
so as to indemnify themselves from payment of any compensation. Therefore, the
premium so paid will not constitute a taxable perquisite in the employees’ hands ‡.
(C) Perquisites taxable only in the hands of specified employees
[Section 17(2)(iii)]
Any monetary obligation of the employee which is discharged by the employer is
perquisite in the hands of all employees as per section 17(2)(iv). However,
‡
CIT vs. Lala Shri Dhar [1972] 84 ITR 19 (Del.)

3.68 INCOME TAX LAW
sometimes instead of discharging employee’s obligation, employer provides

perquisites in the form of facility to the employee. Such perquisites are taxable in
the hands of specified employees only.
The value of any benefit or amenity granted or provided free of cost or at
concessional rate which have not been included in (A) & (B) above will be taxable
in the hands of specified employees. Followings are the example of such services:
(i) Provision of sweeper, gardener, watchman or personal attendant
(ii) Facility of use of gas, electricity or water supplied by employer
(iii) Free or concessional tickets
(iv) Use of motor car
(v) Free or concessional educational facilities
For valuation of such perquisites, refer discussion on valuation of perquisite.
Meaning of specified employees:
(i) Director employee: An employee of a company who is also a director is a
specified employee. It is immaterial whether he is a full-time director or part-
time director. It also does not matter whether he is a nominee of the
management, workers, financial institutions or the Government. It is also not
material whether or not he is a director throughout the previous year.
(ii) An employee who has substantial interest in the company: An employee
of a company who has substantial interest in that company is a specified
employee. A person has a substantial interest in a company if he is a beneficial
owner of equity shares carrying 20% or more of the voting power in the company.
Beneficial and legal ownership: In order to determine whether a person has
a substantial interest in a company, it is the beneficial ownership of equity
shares carrying 20% or more of the voting power that is relevant rather than
the legal ownership.
Example:
A, Karta of a HUF, is a registered shareholder of Bright Ltd. The amount for
purchasing the shares is financed by the HUF. The dividend is also received by
the HUF. Supposing further that A is an employee in Bright Ltd., the question
arises whether he is a specified employee.

SALARIES 3.69
In this case, he cannot be called a specified person since he has no beneficial

interest in the shares registered in his name. It is only for the purpose of
satisfying the statutory requirements that the shares are registered in the name
of A. All the benefits arising from the shareholding goes to the HUF. Conversely,
it may be noted that an employee who is not a registered shareholder will be
considered as a specified employee if he has beneficial interest in 20% or more
of the equity shares in the company.
(iii) Employee drawing in excess of ` 50,000: An employee other than an

employee described in (i) & (ii) above, whose income chargeable under the
head ‘salaries’ exceeds ` 50,000 is a specified employee. The above salary is
to be considered exclusive of the value of all benefits or amenities not
provided by way of monetary payments.
In other words, for computing the limit of ` 50,000, the following items
have to be excluded or deducted:
(a) all non-monetary benefits;
(b) monetary benefits which are exempt under section 10. This is because
the exemptions provided under section 10 are excluded completely from
salaries.
(c) Standard deduction upto ` 50,000 if the assessee exercises the option of
shifting out of the default tax regime provided under section
115BAC(1A) and ` 75,000 if the assessee is paying tax under default
tax regime [under section 16(ia)].
(d) Deduction for entertainment allowance [under section 16(ii)] and
deduction toward professional tax [under section 16(iii)] are also to be
excluded if the assessee exercises the option of shifting out of the
default tax regime provided under section 115BAC(1A).
If an employee is employed with more than one employer, the aggregate of
the salary received from all employers is to be taken into account in
determining the above ceiling limit of ` 50,000, i.e., Salary for this purpose =
Basic Salary + Dearness Allowance + Commission, whether payable monthly
or turnover based +Bonus + Fees + Any other taxable payment + Any taxable
allowances + Any other monetary benefits – Deductions under section 16]

3.70 INCOME TAX LAW
(2) Valuation of Perquisites

The Income-tax Rules, 1962 contain the provisions for valuation of perquisites. It is
important to note that only those perquisites which the employee actually enjoys have
to be valued and taxed in his hand.
Example:
Suppose a company offers housing accommodation rent-free to an employee but
the latter declines to accept it, then the value of such accommodation obviously
cannot be evaluated and taxed in the hands of the employees.
For the purpose of computing the income chargeable under the head “Salaries”,
the value of perquisites provided by the employer directly or indirectly to the
employee or to any member of his household by reason of his employment shall
be determined in accordance with Rule 3.
(A) Value of rent free accommodation/ Value of accommodation provided
to employee at a concessional rate [Sub-rule (1) of Rule 3]
Accommodation would be deemed to have been provided at a concessional rate, if
the value of accommodation computed in the prescribed manner exceeds the rent
recoverable from, or payable by, the assessee [Explanation to section 17(2)(ii)].
The value of residential accommodation provided by the employer during the
previous year shall be determined in the following manner –
Sl. Circumstances In case of In case of furnished

No. unfurnished accommodation
accommodation
(1) (2) (3) (4)
1. Where the • License fee • The value of perquisite as
accommodation is determined by the determined under
provided by the Central column (3) should be
Central Government or any increased by
Government or State Government (i) If furniture is owned by
any State in respect of employer,
Government to the accommodation in
10% per annum of the
employees either accordance with the
cost of furniture
holding office or rules framed by
(including television sets,
post in connection such Government
radio sets, refrigerators,
with the affairs of
other household

SALARIES 3.71
the Union or of as reduced appliances, air-

such State by conditioning plant or
• the rent actually equipment).
paid by the (ii) If such furniture is hired
employee. from a third party,
• The actual hire charges
payable for the same
as reduced by
• any charges paid or
payable for the same by
the employee during the
previous year
2. Where the (i) 10% of salary in • The value of perquisite as
accommodation is cities having determined under
provided by any population > 40 column (3) should be
other employer lakhs as per 2011 increased by
(a) where the census; (i) If furniture is owned by
accommodation (ii) 7.5% of salary in employer,
is owned by the cities having 10% per annum of the
employer population > 15 cost of furniture
lakhs ≤ 40 lakhs (including television sets,
as per 2011 refrigerators, other
census; household appliances,
(iii) 5% of salary in air-conditioning plant or
other areas, equipment or other
in respect of the similar appliances or
period during which gadgets).
the said (ii) If such furniture is
accommodation was hired from a third
occupied by the party,
employee during the • the actual hire charges
previous year payable for the same
as reduced by as reduced by
the rent, if any, • any charges paid or
actually paid by the payable for the same by
employee. the employee during the
previous year

3.72 INCOME TAX LAW
(b) where the • Actual amount of • The value of perquisite as

accommodation lease rental paid or determined under
is taken on lease payable by the column (3) should be
or rent by the employer or increased by
employer • 10% of salary (i) If furniture is owned by
whichever is lower, employer,
as reduced by 10% per annum of the
• the rent, if any, cost of furniture
actually paid by the (including television sets,
employee. radio sets, refrigerators,
other household
appliances, air-
conditioning plant or
equipment or other
similar appliances or
gadgets).
(ii) If such furniture is
hired from a third
party,
• the actual hire charges
payable for the same
as reduced by
• any charges paid or
payable for the same by
the employee during the
previous year
3. Where the Not applicable • 24% of salary paid or
accommodation is payable for the previous
provided by any year or
employer, whether • the actual charges paid
Government or or payable to such hotel,
any other whichever is lower, for the
employer, in a period during which such
hotel. accommodation is provided
as reduced by
• the rent, if any, actually
paid or payable by the
employee.

SALARIES 3.73
However, where the

employee is provided such
accommodation for a period
not exceeding in aggregate
15 days on his transfer from
one place to another, there
would be no perquisite.
Notes:
(1) Accommodation provided on account of transfer from one place to
another: If an employee is provided with accommodation, on account of his
transfer from one place to another, 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 perquisite value, as calculated above, for a period not exceeding 90
days and thereafter, the value of perquisite shall be charged for both such
accommodations.
(2) Value of perquisite to be restricted to CII: Where the accommodation is
owned or taken on lease or rent by the employer and the same
accommodation is continued to be provided to the same employee for more
than one previous year, the value of perquisite as calculated in Sl. No. 2. above
shall not exceed the amount so calculated for the first previous year, as
multiplied by the amount which is a ratio of the CII for the previous year for
which the value is calculated and the CII for the previous year in which the
accommodation was initially provided to the employee.
(3) Employee serving on deputation: Where the accommodation is provided
by the Central Government or any State Government to an employee who is
serving on deputation with any body or undertaking under the control of such
Government,-
(i) the employer of such an employee shall be deemed to be that body or
undertaking where the employee is serving on deputation; and
(ii) the value of perquisite of such an accommodation shall be the amount

calculated in accordance with Sl. No.2.(a) of the above table, as if the
accommodation is owned by the employer.

3.74 INCOME TAX LAW
(4) “Accommodation” includes a house, flat, farm house or part thereof, or

accommodation in a hotel, motel, service apartment, guest house, caravan,
mobile home, ship or other floating structure.
(5) “Hotel” includes licensed accommodation in the nature of motel, service
apartment or guest house.
(6) “First previous year” means the P.Y. 2023-24 or the previous year in which the
accommodation was provided to the employee, whichever is later.
Meaning of Salary for Valuation Rules

“Salary” includes pay, allowances, bonus or commission payable monthly or otherwise
or any monetary payment, by whatever name called, from one or more employers, as
the case may be. However, it does not include the following, namely–
(1) dearness allowance or dearness pay unless it enters into the computation of
superannuation or retirement benefits of the employee concerned;
(2) employer’s contribution to the provident fund account of the employee;
(3) allowances which are exempted from the payment of tax;
(4) value of the perquisites specified in section 17(2);
(5) any payment or expenditure specifically excluded under proviso to section
17(2);
(6) lump-sum payments received at the time of termination of service or
superannuation or voluntary retirement, like gratuity, severance pay, leave
encashment, voluntary retrenchment benefits, commutation of pension and
similar payments;
ILLUSTRATION 14
Mr. C is a Finance Manager in ABC Ltd. The company has provided him with rent-
free unfurnished accommodation in Mumbai. He gives you the following particulars:
Basic salary ` 8,500 p.m.
Dearness Allowance ` 2,000 p.m. (30% is for retirement benefits)
Bonus ` 1,500 p.m.
Even though the company allotted the house to him on 1.4.2024, he occupied the
same only from 1.11.2024. Calculate the taxable value of the perquisite for
A.Y.2025-26.

SALARIES 3.75
SOLUTION
Value of the rent free unfurnished accommodation
= 10% of salary for the relevant period

= 10% of [(` 8,500 × 5) + (` 2,000 × 30% × 5) + (` 1,500 × 5)] [See Note below]
= 10% of ` 53,000 = ` 5,300.
Note: Since, Mr. C occupies the house only from 1.11.2024, we have to include the
salary due to him only in respect of months during which he has occupied the
accommodation. Hence salary for 5 months (i.e. from 1.11.2024 to 31.03.2025) will
be considered.
ILLUSTRATION 15
Using the data given in the previous illustration 14, compute the value of the
perquisite if Mr. C is required to pay a rent of ` 1,000 p.m. to the company, for the
use of this accommodation.
SOLUTION
First of all, we have to see whether the accommodation is provided at a
concessional rate. If the value of accommodation computed in prescribed manner
exceeds the rent recoverable, or payable by, the assessee, the accommodation
would be deemed to have been provided at a concessional rate.
In this case, 10% of salary would be ` 5,300 (i.e. 10% of ` 53,000). The rent paid by
the employee is ` 5,000 (i.e., ` 1,000 x 5). Since 15% of salary exceeds the rent
recovered from the employee, the accommodation would be deemed to have been
provided at a concessional rate.
Value of the accommodation = ` 5,300
Less: Rent paid by the employee (` 1,000 × 5) = ` 5,000
Perquisite value of accommodation given at a concessional rent = ` 300
ILLUSTRATION 16
Using the data given in illustration 14, compute the value of the perquisite if ABC
Ltd. has taken this accommodation on a lease rent of ` 1,025 p.m. and Mr. C is
required to pay a rent of ` 1,000 p.m. to the company, for the use of this
accommodation.

3.76 INCOME TAX LAW
SOLUTION
Here again, we have to see whether the accommodation is provided at a
concessional rate.
In the case of accommodation taken on lease by the employer, the accommodation
would be deemed to have been provided at a concessional rate if the rent paid by
the employer or 10% of salary, whichever is lower, exceeds rent recoverable from
the employee.
In this case, 10% of salary is ` 5,300 (i.e. 10% of ` 53,000). Rent paid by the employer
is ` 5,125 (i.e. ` 1,025 x 5). The lower of the two is ` 5,125, which exceeds the rent
paid by the employee i.e., ` 5,000 (` 1,000 x 5). Therefore, the accommodation
would be deemed to have been provided at a concessional rate.
Value of the accommodation [Note] = ` 5,125
Value of accommodation given at a concessional rent = ` 125
Note: Value of the accommodation is lower of
(i) Lease rent paid by the company for relevant period = ` 1,025 × 5 = ` 5,125
(ii) 10% of salary for the relevant period (computed earlier) = ` 5,300
ILLUSTRATION 17
Using the data given in illustration 14, compute the value of the perquisite if ABC
Ltd. has provided a television (WDV ` 10,000; Cost ` 25,000) and two air conditioners.
The rent paid by the company for the air conditioners is ` 400 p.m. each. The
television was provided on 1.1.2025. However, Mr. C is required to pay a rent of
` 1,000 p.m. to the company, for the use of this furnished accommodation.
SOLUTION
Here again, we have to see whether the accommodation is provided at a
concessional rate. In the case of accommodation owned by the employer in a city
having a population exceeding 40 lakhs, the accommodation would be deemed to
have been provided at a concessional rate, if 10% of salary exceeds rent recoverable
from the employee. In case of furnished accommodation, the excess of hire charges
paid or 10% p.a. of the cost of furniture, as the case may be, over and above the
charges paid or payable by the employee has to be added to the value arrived at
above to determine whether the accommodation is provided at a concessional rate.

SALARIES 3.77
In this case, 10% of salary is ` 5,300 (i.e. 10% of ` 53,000). The value of furniture of
` 4,625 (See Note below) is to be added to 10% of salary. The rent paid by the
employee is ` 5,000 (i.e. ` 1,000 x 5). Therefore, the accommodation would be
deemed to have been provided at a concessional rate.
Value of the accommodation (computed earlier) = ` 5,300
Add: Value of furniture provided by the employer [Note] = ` 4,625
Value of furnished accommodation = ` 9,925
Value of furnished accommodation given at a concessional rent = ` 4,925
Note: Value of the furniture provided = (` 400 p.m. × 2 × 5 months) + (` 25,000 ×
10% p.a. for 3 months) = ` 4,000 + ` 625 = ` 4,625
ILLUSTRATION 18
Using the data given in illustration 17 above, compute the value of the perquisite if
Mr. C is a government employee. The licence fees determined by the Government for this
accommodation was ` 700 p.m.
SOLUTION
In the case of Government employees, the accommodation would be deemed to
have been provided at a concessional rate, if the licence fees determined by the
employer as increased by the value of furniture and fixture exceeds the rent recovered/
recoverable from the employee.
In this case, ` 3,500 (licence fees: ` 700 x 5) + ` 4,625 (Value of furniture) is the value
of furnished accommodation. The rent paid by the employee is ` 5,000 (i.e. ` 1,000
x 5). Therefore, the accommodation would be deemed to have been provided at a
concessional rate.
Value of the accommodation (` 700 × 5) = ` 3,500
Add: Value of furniture provided by the employer (computed earlier) = ` 4,625
Value of furnished accommodation = ` 8,125

Perquisite value of furnished accommodation given at concessional rent = ` 3,125

3.78 INCOME TAX LAW
(B) Motor Car [Sub-rule (2) of Rule 3]

If motor car is provided by the employer to the employee, it will be perquisite in
the hands of specified employees only. However, the use of any vehicle provided
by a company or an employer for journey by the assessee from his residence to his
office or other place of work, or from such office or place to his residence shall not
be regarded as a benefit given or provided to him free of cost or at concessional
rate. [Explanation below section 17(2)(iii)]
But if the motor car is owned by the employee and used by him or members of his
family wholly for personal purposes and for which employer reimburses the running
and maintenance expenses of the car, it will be perquisite in the hands of all employees.
The value of perquisite by way of use of motor car to an employee by an employer
shall be determined in the following manner –
VALUE OF PERQUISITE PER CALENDAR MONTH
Sl. Circumstances Where cubic capacity Where cubic capacity of

No. of engine does not engine exceeds 1.6 litres
exceed 1.6 litres
(1) (2) (3) (4)
(1) Where the motor
car is owned or
hired by the
employer and –
(a) is used wholly Not a perquisite, Not a perquisite, provided
and exclusively in provided the the documents specified
the performance documents specified in Note (2) below the table
of his official in Note (2) below the are maintained by the
duties table are maintained employer.
by the employer.
(b) is used Actual amount of Actual amount of
exclusively for expenditure incurred expenditure incurred by
the private or by the employer on the the employer on the
personal running and running and maintenance
purposes of the maintenance of motor of motor car during the
employee or any car during the relevant relevant previous year
member of his previous year including including remuneration, if
household and remuneration, if any, any, paid by the employer
the running and paid by the employer to the chauffeur as

SALARIES 3.79
maintenance to the chauffeur as increased by the amount

expenses are met increased by the representing normal wear
or reimbursed by amount representing and tear of the motor car
the employer; normal wear and tear and as reduced by any
of the motor car and as amount charged from the
reduced by any employee for such use.
amount charged from
the employee for such
use.
(c) is used partly in
the performance
of duties and
partly for private
or personal
purposes of his
own or any
member of his
household and-
(i) the expenses on ` 1,800 (plus ` 900, if ` 2,400 (plus ` 900, if
maintenance and chauffeur is also chauffeur is also provided
running are met provided to run the to run the motor car)
or reimbursed by motor car)
the employer ` 900 (plus ` 900, if
(ii) the expenses on ` 600 (plus ` 900, if chauffeur is also provided
running and chauffeur is also by the employer to run the
maintenance for provided by the motor car)
private or personal employer to run the
use are fully met motor car)
by the assessee.
(2) Where the employee
owns a motor car but
the actual running
and maintenance
charges (including
remuneration of the
chauffeur, if any) are
met or reimbursed
to him by the
employer and –

3.80 INCOME TAX LAW
(a) such Not a perquisite, Not a perquisite, provided

reimbursement is provided the the documents specified
for the use of the documents specified in Note (2) below the table
vehicle wholly in Note (2) below the are maintained by the
and exclusively table are maintained employer.
for official by the employer.
purposes
(b) such The actual amount of The actual amount of
reimbursement is expenditure incurred expenditure incurred by
for the use of the by the employer as the employer as reduced
vehicle partly for reduced by the by the amount specified in
official purposes amount specified in Sl. No. (1)(c)(i) above (Also
and partly for Sl. No. (1)(c)(i) above see note (2) below this
personal or (Also see note (2) table).
private purposes below this table).
of the employee
or any member of
his household.
(3) Where the employee
owns any other
automotive
conveyance but the
actual running and
maintenance
charges are met or
reimbursed to him
by the employer and
(a) such Not a perquisite, Not applicable.
reimbursement is provided the
for the use of the documents specified in
vehicle wholly and the note (2) below the
exclusively for table are maintained
official purposes by the employer.
(b) such The actual amount of

reimbursement is expenditure incurred
for the use of by the employer as
vehicle partly for reduced by the amount
official purposes

SALARIES 3.81
and partly for of ` 900. (Also see note

personal or private (2) below the table)
purposes of the
employee
Notes:
(1) Where more than one motor car is provided - Where one or more motor-
cars are owned or hired by the employer and the employee or any member
of his household are allowed the use of such motor-car or all of any of such
motor-cars (otherwise than wholly and exclusively in the performance of his
duties), the value of perquisite shall be the amount calculated in respect of
one car as if the employee had been provided one motor-car for use partly
in the performance of his duties and partly for his private or personal
purposes and the amount calculated in respect of the other car or cars as if
he had been provided with such car or cars exclusively for his private or
personal purposes.
(2) Documents to be maintained in certain cases - Where the employer or the
employee claims that the motor-car is used wholly and exclusively in the
performance of official duty or that the actual expenses on the running and
maintenance of the motor-car owned by the employee for official purposes
is more than the amounts deductible in Sl. No. 2(b) or 3(b) of the above table,
he may claim a higher amount attributable to such official use and the value
of perquisite in such a case shall be the actual amount of charges met or
reimbursed by the employer as reduced by such higher amount attributable
to official use of the vehicle provided that the following conditions are
fulfilled :-
(a) the employer has maintained complete details of journey undertaken
for official purpose which may include date of journey, destination,
mileage, and the amount of expenditure incurred thereon;
(b) the employer gives a certificate to the effect that the expenditure was
incurred wholly and exclusively for the performance of official duties.
(3) Meaning of Normal wear and tear of a motor-car - For computing the
perquisite value of motor car, the normal wear and tear of a motor car shall
be taken at 10% per annum of the actual cost of the motor-car or cars.

3.82 INCOME TAX LAW
(C) Valuation of benefit of provision of domestic servants

[Sub-rule (3) of Rule 3]
If servants are engaged by the employee and employer paid or reimbursed the
employee for the wages of such servants, it will be perquisite in the hands of all
employees. But if the domestic servants are engaged by the employer and facility
of such servants is provided to the employee, it will be perquisite in the hands of
specified employees only.
(i) The value of benefit to the employee or any member of his household
resulting from the provision by the employer of the services of a sweeper, a
gardener, a watchman or a personal attendant, shall be the actual cost to the
employer.
(ii) The actual cost in such a case shall be the total amount of salary paid or
payable by the employer or any other person on his behalf for such services
as reduced by any amount paid by the employee for such services.
ILLUSTRATION 19
Mr. X and Mr. Y are working for M/s. Gama Ltd. As per salary fixation norms, the following
perquisites were offered:
(i) For Mr. X, who engaged a domestic servant for ` 500 per month, his employer
reimbursed the entire salary paid to the domestic servant i.e. ` 500 per month.
(ii) For Mr. Y, he was provided with a domestic servant @ ` 500 per month as part
of remuneration package.
You are required to comment on the taxability of the above in the hands of Mr. X and
Mr. Y, who are not specified employees.
SOLUTION
In the case of Mr. X, it becomes an obligation which the employee would have
discharged even if the employer did not reimburse the same. Hence, the perquisite will
be covered under section 17(2)(iv) and will be taxable in the hands of Mr. X. This is
taxable in the case of all employees.
In the case of Mr. Y, it cannot be considered as an obligation which the employee
would meet. The employee might choose not to have a domestic servant. This is
taxable only in the case of specified employees covered by section 17(2)(iii). Hence,
there is no perquisite element in the hands of Mr. Y.

SALARIES 3.83
(D) Valuation of gas, electricity or water supplied by employer

[Sub-rule (4) of Rule 3]
If gas, electricity or water connections are taken by the employee and employer
paid or reimbursed the employee for such expenses, it will be perquisite in the
hands of all employees. But if the gas, electricity or water connections are taken in
the name of employer and facility of such supplies are provided to the employee,
it will be perquisite in the hands of specified employees only. The value of benefit
to the employee resulting from the provision of gas, electricity or water supplied
by the employer shall be determined as follow:
Circumstances Value of benefit

If payment is made to agency sum equal to the amount paid on that
supplying of gas, electricity etc. account by the employer to the agency
supplying the gas, electric energy or water
If supply is made from resources manufacturing cost per unit incurred by the
owned by the employer employer
Where the employee is paying any amount in respect of such services, the amount
so paid shall be deducted from the value so arrived at.
(E) Valuation of free or concessional educational facilities [Sub-rule (5)
of Rule 3]
If school fees of children of employee or any member of employee’s house hold is paid
or reimbursed by the employer on employee’s behalf, it will be perquisite in the hands
of all employees. But if the education facility is provided in the school maintained by
the employer or in any school by reason of his being employment at free of cost or at
concessional rate, it would be perquisite in the hands of specified employees only. The
value of benefit to the employee resulting from the provision of free or concessional
educational facility for any member of his household shall be determined as follow:
Circumstances Value of benefit

If the educational institution is cost of such education in a similar
maintained and owned by the employer institution in or near the locality.
If free educational facilities are allowed in However, there would be no perquisite
any other educational institution by if the cost of such education or the
reason of his being in employment of value of such benefit per child does
that employer not exceed ` 1,000 p.m.
Others amount of expenditure incurred by the
employer in that behalf

3.84 INCOME TAX LAW
Where any amount is paid or recovered from the employee on that account, the
value of benefit shall be reduced by the amount so paid or recovered.
Note: The exemption of ` 1,000 p.m. is allowed only in case of education facility
provided to the children of the employee and not in case of education facility
provided to other household members.
(F) Free or concessional tickets [Sub-rule (6) of Rule 3]
The value of any benefit or amenity resulting from the provision by an employer
• who is engaged in the carriage of passengers or goods,
• to any employee or to any member of his household for personal or private

journey free of cost or at concessional fare,
• in any conveyance owned, leased or made available by any other
arrangement by such employer for the purpose of transport of passengers or
goods
shall be taken to be the value at which such benefit or amenity is offered by such
employer to the public as reduced by the amount, if any, paid by or recovered from
the employee for such benefit or amenity.
However, there would be no such perquisite to the employees of an airline or the
railways.
(G) Valuation of other fringe benefits and amenities [Sub-rule (7) of Rule 3]
Section 17(2)(viii) provides that the value of any other fringe benefit or amenity as may
be prescribed would be included in the definition of perquisite and taxable in the
hands of all employees. Accordingly, the following other fringe benefits or amenities
are prescribed and the value thereof shall be determined in the manner provided
hereunder:-
(i) Interest-free or concessional loan [Sub-rule 7(i) of Rule 3]
(a) The value of the benefit to the assessee resulting from the provision of
interest-free or concessional loan for any purpose made available to
• the employee or
• any member of his household
during the relevant previous year by the employer or any person on his
behalf shall be determined as the sum equal to the interest computed

SALARIES 3.85
at the rate charged per annum by the State Bank of India, as on the 1st
day of the relevant previous year in respect of loans for the same
purpose advanced by it on the maximum outstanding monthly balance
as reduced by the interest, if any, actually paid by him or any such
member of his household.
“Maximum outstanding monthly balance” means the aggregate
outstanding balance for each loan as on the last day of each month.
(b) However, no value would be charged if such loans are made available
for medical treatment in respect of prescribed diseases (like cancer,
tuberculosis, etc.) or where the amount of loans are not exceeding in
the aggregate ` 20,000.
(c) Further, where the benefit relates to the loans made available for
medical treatment referred to above, the exemption so provided shall
not apply to so much of the loan as has been reimbursed to the
employee under any medical insurance scheme.
(ii) Travelling, touring and accommodation [Sub-rule 7(ii) of Rule 3]
(a) If Travelling, touring, accommodation etc. expenses are paid or
reimbursed by employer - The value of travelling, touring,
accommodation and any other expenses paid for or borne or
reimbursed by the employer for any holiday availed of by the employee
or any member of his household, other than leave travel concession or
assistance, shall be determined as the sum equal to the amount of the
expenditure incurred by such employer in that behalf.
(b) If Travelling, touring, accommodation etc. facilities are maintained
by employer to particular employees only - Where such facility is
maintained by the employer, and is not available uniformly to all
employees, the value of benefit shall be taken to be the value at which
such facilities are offered by other agencies to the public.
(c) Expenses on any member of household accompanying such
employee on office tour - Where the employee is on official tour and
the expenses are incurred in respect of any member of his household
accompanying him, the amount of expenditure so incurred shall also be
a fringe benefit or amenity.

3.86 INCOME TAX LAW
(d) If official tour is extended as vacation - However, where any official tour
is extended as a vacation, the value of such fringe benefit shall be limited to
the expenses incurred in relation to such extended period of stay or
vacation. The amount so determined shall be reduced by the amount, if any,
paid or recovered from the employee for such benefit or amenity.
(iii) Free or concessional food and non-alcoholic beverages
[Sub-rule 7(iii) of Rule 3]
(a) The value of free food and non-alcoholic beverages provided by the
employer to an employee shall be the amount of expenditure incurred
by such employer. The amount so determined shall be reduced by the
amount, if any, paid or recovered from the employee for such benefit
or amenity.
(b) However, the following would not be treated as a perquisite -
(1) free food and non-alcoholic beverages provided by such employer
• during working hours at office or business premises or

• through paid vouchers which are not transferable and
usable only at eating joints,
to the extent the value thereof either case does not exceed fifty
rupees per meal or
(2) tea or snacks provided during working hours or
(3) free food and non-alcoholic beverages during working hours
provided in a remote area or an off-shore installation.
Exemption in respect of free food and non-alcoholic beverage
provided by such employer through paid voucher would not
be available in case an employee pays tax under the default
tax regime under section 115BAC.
(iv) Value of gift, voucher or token in lieu of such gift
[Sub-rule 7(iv) of Rule 3]
(a) The value of any gift, or voucher, or token in lieu of which such gift may
be received by the employee or by member of his household on
ceremonial occasions or otherwise from the employer shall be
determined as the sum equal to the amount of such gift:

SALARIES 3.87
(b) However, if the value of such gift, voucher or token, as the case may be,
is below ` 5,000 in the aggregate during the previous year, the value of
perquisite shall be taken as ‘Nil’.
(v) Credit card expenses [Sub-rule 7(v) of Rule 3]
(a) The amount of expenses including membership fees and annual fees
incurred by the employee or any member of his household, which is
charged to a credit card (including any add-on-card) provided by the
employer, or otherwise, paid for or reimbursed by such employer shall
be taken to be the value of perquisite chargeable to tax as reduced by
the amount, if any paid or recovered from the employee for such benefit
or amenity.
(b) However, such expenses incurred wholly and exclusively for official
purposes would not be treated as a perquisite if the following
conditions are fulfilled.
(1) complete details in respect of such expenditure are maintained by

the employer which may, inter alia, include the date of
expenditure and the nature of expenditure;
(2) the employer gives a certificate for such expenditure to the effect
that the same was incurred wholly and exclusively for the
performance of official duties.
(vi) Club expenditure [Sub-rule 7(vi) of Rule 3]

(a) The value of benefit to the employee resulting from the payment or
reimbursement by the employer of any expenditure incurred (including the
amount of annual or periodical fee) in a club by him or by a member of his
household shall be determined to be the actual amount of expenditure
incurred or reimbursed by such employer on that account. The amount so
determined shall be reduced by the amount, if any, paid or recovered from
the employee for such benefit or amenity.
However, where the employer has obtained corporate membership of
the club and the facility is enjoyed by the employee or any member of
his household, the value of perquisite shall not include the initial fee
paid for acquiring such corporate membership.

3.88 INCOME TAX LAW
(b) Further, if such expenditure is incurred wholly and exclusively for

business purposes, it would not be treated as a perquisite provided the
following conditions are fulfilled:-
(1) complete details in respect of such expenditure are maintained by
the employer which may, inter alia, include the date of expenditure,
the nature of expenditure and its business expediency;
(2) the employer gives a certificate for such expenditure to the effect
that the same was incurred wholly and exclusively for the
performance of official duties.
(c) There would be no perquisite for use of health club, sports and similar
facilities provided uniformly to all employees by the employer.
(vii) Use of moveable assets [Sub-rule 7(vii) of Rule 3]
Value of perquisite is determined as under:
Asset given Value of benefit
(a) Use of laptops and computers Nil
(b) Movable assets, other than - 10% p.a. of the actual cost of such
(i) laptops and computers; asset, or the amount of rent or
and charge paid, or payable by the
employer, as the case may be
(ii) assets already specified
Note: Where the employee is paying any amount in respect of such asset, the
amount so paid shall be deducted from the value of perquisite determined
above.
(viii) Transfer of moveable assets [Sub-rule 7(viii) of Rule 3]
Value of perquisite is determined as under:
Assets Value of perquisite

transferred
Computers and Depreciated value of asset [depreciation is computed

electronic items @50% on WDV for each completed year of usage]
Motor cars Depreciated value of asset [depreciation is computed

@20% on WDV for each completed year of usage]

SALARIES 3.89
Any other asset Depreciated value of asset [depreciation is computed

@10% on SLM for each completed year of usage]
Note: Where the employee is paying any amount in respect of such asset, the
amount so paid shall be deducted from the value of perquisite determined
above.
(ix) Other benefit or amenity [Sub-rule 7(ix) of Rule 3]
The value of any other benefit or amenity, service, right or privilege provided
by the employer shall be determined on the basis of cost to the employer
under an arms' length transaction as reduced by the employee's contribution,
if any.
However, there will be no taxable perquisite in respect of expenses on

telephones including mobile phone actually incurred on behalf of the
employee by the employer i.e., if an employer pays or reimburses telephone
bills or mobile phone charges of employee, there will be no taxable
perquisite.
ILLUSTRATION 20
Mr. X retired from the services of M/s Y Ltd. on 31.01.2025, after completing service of 30
years and one month. He had joined the company on 1.1.1995 at the age of 30 years
and received the following on his retirement:
(i) Gratuity ` 6,00,000. He was covered under the Payment of Gratuity Act, 1972.
(ii) Leave encashment of ` 3,30,000 for 330 days leave balance in his account. He
was credited 30 days leave for each completed year of service.
(iii) As per the scheme of the company, he was offered a car which was purchased
on 30.01.2022 by the company for ` 5,00,000. Company has recovered
` 2,00,000 from him for the car. Company depreciates the vehicles at the rate
of 15% on Straight Line Method.
(iv) An amount of ` 3,00,000 as commutation of pension for 2/3 of his pension
commutation.
(v) Company presented him a gift voucher worth ` 6,000 on his retirement.
(vi) His colleagues also gifted him a Television (LCD) worth ` 50,000 from their own
contribution.

3.90 INCOME TAX LAW
Following are the other particulars:

(i) He has drawn a basic salary of ` 20,000 and 50% dearness allowance per month
for the period from 01.04.2024 to 31.01.2025.
(ii) Received pension of ` 5,000 per month for the period 01.02.2025 to 31.03.2025
after commutation of pension.
Compute his gross total income from the above for Assessment Year 2025-26
assuming he exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A).
SOLUTION
Computation of Gross Total Income of Mr. X for A.Y. 2025-26
Particulars `
Basic Salary = ` 20,000 x 10 2,00,000
Dearness Allowance = 50% of basic salary 1,00,000
Gift Voucher (See Note - 1) 6,000
Transfer of car (See Note - 2) 56,000
Gratuity (See Note - 3) 80,769
Leave encashment (See Note - 4) 1,30,000
Uncommuted pension (` 5000 x 2) 10,000
Commuted pension (See Note - 5) 1,50,000
Less: Standard deduction u/s 16(ia) 50,000
Taxable Salary /Gross Total Income 6,82,769
Notes:
(1) As per Rule 3(7)(iv), the value of any gift or voucher or token in lieu of gift
received by the employee or by member of his household not exceeding
` 5,000 in aggregate during the previous year is exempt. In this case, the
amount was received on his retirement and the sum exceeds the limit of
` 5,000.
Therefore, the entire amount of ` 6,000 is liable to tax as perquisite.
Note – An alternate view possible is that only the sum in excess of ` 5,000 is
taxable. In such a case, the value of perquisite would be ` 1,000 and gross total
income would be ` 7,27,769.

SALARIES 3.91
(2) Perquisite value of transfer of car: As per Rule 3(7)(viii), the value of benefit
to the employee, arising from the transfer of an asset, being a motor car, by
the employer is the actual cost of the motor car to the employer as reduced
by 20% of WDV of such motor car for each completed year during which such
motor car was put to use by the employer. Therefore, the value of perquisite
on transfer of motor car, in this case, would be:
Particulars `
Purchase price (30.1.2022) 5,00,000
Less: Depreciation @ 20% 1,00,000
WDV on 29.1.2023 4,00,000
Less: Depreciation @ 20% 80,000
WDV on 29.1.2024 3,20,000
Less: Depreciation @ 20% 64,000
WDV on 29.1.2025 2,56,000
Less: Amount recovered 2,00,000
Value of perquisite 56,000
The rate of 15% as well as the straight line method adopted by the company
for depreciation of vehicle is not relevant for calculation of perquisite value
of car in the hands of Mr. X.
(3) Taxable gratuity
Particulars `
Gratuity received 6,00,000
Less : Exempt under section 10(10) - Least of the following:
(i) Notified limit = ` 20,00,000
(ii) Actual gratuity = ` 6,00,000
(iii) 15/26 x last drawn salary x no. of completed years
of services or part in excess of 6 months
15/26 x ` 30,000 x 30 = ` 5,19,231 5,19,231
Taxable Gratuity 80,769
Note: As per the Payment of Gratuity Act, 1972, D.A. is included in the meaning
of salary. Since in this case, Mr. X is covered under payment of Payment of

3.92 INCOME TAX LAW
Gratuity Act, 1972, D.A. has to be included within the meaning of salary for
computation of exemption under section 10(10).
(4) Taxable leave encashment
Particulars `
Leave Salary received 3,30,000
Less : Exempt under section 10(10AA) - Least of the following:
(i) Notified limit ` 25,00,000
(ii) Actual leave salary ` 3,30,000
(iii) 10 months x ` 20,000 ` 2,00,000
(iv) Cash equivalent of leave to his credit ` 2,20,000
 330 
 30 ×20,000  2,00,000
 
Taxable Leave encashment 1,30,000
Note – It has been assumed that dearness allowance does not form part of
salary for retirement benefits. In case it is assumed that dearness allowance
forms part of pay for retirement benefits, then, the third limit for exemption
under section 10(10AA) in respect of leave encashment would be ` 3,00,000
(i.e. 10 x ` 30,000) and the fourth limit ` 3,30,000, in which case, the taxable
leave encashment would be ` 30,000 (` 3,30,000-` 3,00,000). In such a case,
the gross total income would be ` 6,32,769.
(5) Commuted Pension
Since Mr. X is a non-government employee in receipt of gratuity, exemption
under section 10(10A) would be available to the extent of 1/3rd of the amount
of the pension which he would have received had he commuted the whole of
the pension.
Particulars `
Amount received 3,00,000
1  3
Less: Exemption under section 10(10A) = × 3,00,000×  1,50,000
3  2
Taxable amount 1,50,000
(6) The taxability provisions under section 56(2)(x) are not attracted in respect of
television received from colleagues, since television is not included in the
definition of property therein.

SALARIES 3.93
ILLUSTRATION 21
Shri Bala employed in ABC Co. Ltd. as Finance Manager gives you the list of
perquisites provided by the company to him for the entire financial year 2024-25:
(i) Domestic servant was provided at the residence of Bala. Salary of domestic
servant is ` 1,500 per month. The servant was engaged by him and the salary
is reimbursed by the company (employer).
In case the company has employed the domestic servant, what is the value of
perquisite?
(ii) Free education was provided to his two children Arthy and Ashok in a school
maintained and owned by the company. The cost of such education for Arthy
is computed at ` 900 per month and for Ashok at ` 1,200 per month. No amount
was recovered by the company for such education facility from Bala.
(iii) The employer has provided movable assets such as television, refrigerator and
air-conditioner at the residence of Bala. The actual cost of such assets provided
to the employee is ` 1,10,000.
(iv) A gift voucher worth ` 10,000 was given on the occasion of his marriage
anniversary. It is given by the company to all employees above certain grade.
(v) Telephone provided at the residence of Shri Bala and the bill aggregating to
` 25,000 paid by the employer.
(vi) Housing loan @ 6% per annum. Amount outstanding on 1.4.2024 is
` 6,00,000. Shri Bala pays ` 12,000 per month towards principal, on 5th of each
month.
Compute the chargeable perquisite in the hands of Mr. Bala for the A.Y. 2025-26.
The lending rate of State Bank of India as on 1.4.2024 for housing loan may be taken
as 10%.
SOLUTION
Taxability of perquisites provided by ABC Co. Ltd. to Shri Bala

(i) Domestic servant was employed by the employee and the salary of such
domestic servant was paid/ reimbursed by the employer. It is taxable as
perquisite for all categories of employees.
Taxable perquisite value = ` 1,500 × 12 = ` 18,000.

3.94 INCOME TAX LAW
If the company had employed the domestic servant and the facility of such
servant is given to the employee, then the perquisite is taxable only in the
case of specified employees. The value of the taxable perquisite in such a case
also would be ` 18,000.
(ii) Where the educational institution is owned by the employer, the value of
perquisite in respect of free education facility shall be determined with
reference to the reasonable cost of such education in a similar institution in
or near the locality. However, there would be no perquisite if the cost of such
education per child does not exceed ` 1,000 per month.
Therefore, there would be no perquisite in respect of cost of free education
provided to his child Arthy, since the cost does not exceed ` 1,000 per month.
However, the cost of free education provided to his child Ashok would be
taxable, since the cost exceeds ` 1,000 per month. The taxable perquisite
value would be ` 14,400 (` 1,200 × 12).
Note – An alternate view possible is that only the sum in excess of ` 1,000 per
month is taxable. In such a case, the value of perquisite would be ` 2,400.
(iii) Where the employer has provided movable assets to the employee or any
member of his household, 10% per annum of the actual cost of such asset
owned or the amount of hire charges incurred by the employer shall be the
value of perquisite. However, this will not apply to laptops and computers. In
this case, the movable assets are television, refrigerator and air conditioner
and actual cost of such assets is ` 1,10,000.
The perquisite value would be 10% of the actual cost i.e., ` 11,000, being 10%
of ` 1,10,000.
(iv) The value of any gift or voucher or token in lieu of gift received by the
employee or by member of his household not exceeding ` 5,000 in aggregate
during the previous year is exempt. In this case, the amount was received on
the occasion of marriage anniversary and the sum exceeds the limit of ` 5,000.
Note - An alternate view possible is that only the sum in excess of ` 5,000 is
taxable. In such a case, the value of perquisite would be ` 5,000
(v) Telephone provided at the residence of the employee and payment of bill by
the employer is a tax free perquisite.

SALARIES 3.95
(vi) The value of the benefit to the assessee resulting from the provision of
interest-free or concessional loan made available to the employee or any
member of his household during the relevant previous year by the employer
or any person on his behalf shall be determined as the sum equal to the
interest computed at the rate charged per annum by the State Bank of India
(SBI) as on the 1st day of the relevant previous year in respect of loans for the
same purpose advanced by it. This rate should be applied on the maximum
outstanding monthly balance and the resulting amount should be reduced
by the interest, if any, actually paid by him.
“Maximum outstanding monthly balance” means the aggregate outstanding
balance for loan as on the last day of each month.
The perquisite value for computation is 10% - 6% = 4%
Month Maximum outstanding Perquisite value at

balance as on last date 4% for the month (`)
of month (`)
April, 2024 5,88,000 1,960
May, 2024 5,76,000 1,920
June, 2024 5,64,000 1,880
July, 2024 5,52,000 1,840
August, 2024 5,40,000 1,800
September, 2024 5,28,000 1,760
October, 2024 5,16,000 1,720
November, 2024 5,04,000 1,680
December, 2024 4,92,000 1,640
January, 2025 4,80,000 1,600
February, 2025 4,68,000 1,560
March, 2025 4,56,000 1,520
Total value of this perquisite 20,880
Total value of taxable perquisite

= ` 74,280 [i.e. ` 18,000 + ` 14,400 + ` 11,000 + ` 10,000 + ` 20,880].
Note - In case the alternate views are taken for items (ii) & (iv), the total value
of taxable perquisite would be ` 57,280 [i.e., ` 18,000 + ` 2,400 + ` 11,000 +
` 5,000 + ` 20,880].

3.96 INCOME TAX LAW
(H) Valuation of specified security or sweat equity share for the purpose of
section 17(2)(vi) [Sub-rule (8)]
The fair market value of any specified security or sweat equity share, being an
equity share in a company, on the date on which the option is exercised by the
employee, shall be determined in the following manner -
(1) If shares are listed on recognized stock exchange - In a case where, on the
date of the exercising of the option, the share in the company is listed on a
recognized stock exchange, the fair market value shall be the average of the
opening price and closing price of the share on that date on the said stock
exchange.
If shares are listed on more than one recognized stock exchange -Where,
on the date of exercising of the option, the share is listed on more than one
recognized stock exchanges, the fair market value shall be the average of
opening price and closing price of the share on the recognised stock
exchange which records the highest volume of trading in the share.
If no trading in share on recognized stock exchange - Where on the date
of exercising of the option, there is no trading in the share on any recognized
stock exchange, the fair market value shall be -
(a) the closing price of the share on any recognised stock exchange on a
date closest to the date of exercising of the option and immediately
preceding such date; or
(b) the closing price of the share on a recognised stock exchange, which
records the highest volume of trading in such share, if the closing price,
as on the date closest to the date of exercising of the option and
immediately preceding such date, is recorded on more than one
recognized stock exchange.
“Closing price” of a share on a recognised stock exchange on a date shall be

the price of the last settlement on such date on such stock exchange.
However, where the stock exchange quotes both “buy” and “sell” prices, the
closing price shall be the “sell” price of the last settlement.
“Opening price” of a share on a recognised stock exchange on a date shall
be the price of the first settlement on such date on such stock exchange.

SALARIES 3.97
However, where the stock exchange quotes both “buy” and “sell” prices, the
opening price shall be the “sell” price of the first settlement.
(2) If shares are not listed on recognized stock exchange -In a case where, on
the date of exercising of the option, the share in the company is not listed on a
recognised stock exchange, the fair market value shall be such value of the share
in the company as determined by a merchant banker on the specified date.
For this purpose, “specified date” means,—
(i) the date of exercising of the option; or
(ii) any date earlier than the date of the exercising of the option, not being
a date which is more than 180 days earlier than the date of the
exercising.
Note: Where any amount has been recovered from the employee, the same shall
be deducted to arrive at the value of perquisites.
ILLUSTRATION 22
AB Co. Ltd. allotted 1000 sweat equity shares to Sri Chand in June 2024. The shares were
allotted at ` 200 per share as against the fair market value of ` 300 per share on the
date of exercise of option by the allottee viz. Sri Chand. The fair market value was
computed in accordance with the method prescribed under the Act.
(i) What is the perquisite value of sweat equity shares allotted to Sri Chand?
(ii) In the case of subsequent sale of those shares by Sri Chand, what would be the
cost of acquisition of those sweat equity shares?
SOLUTION
(i) As per section 17(2)(vi), the value of sweat equity shares chargeable to tax as
perquisite shall be the fair market value of such shares on the date on which
the option is exercised by the assessee as reduced by the amount actually
paid by, or recovered from, the assessee in respect of such shares.
Particulars `
Fair market value of 1000 sweat equity shares @ ` 300 each 3,00,000
Less: Amount recovered from Sri Chand 1000 shares @ ` 200 each 2,00,000
Value of perquisite of sweat equity shares allotted to Sri 1,00,000
Chand

3.98 INCOME TAX LAW
(ii) As per section 49(2AA), where capital gain arises from transfer of sweat equity
shares, the cost of acquisition of such shares shall be the fair market value
which has been taken into account for perquisite valuation under section
17(2)(vi). (The provisions of section 49 are discussed in Unit 4: Capital Gains of
this chapter)
Therefore, in case of subsequent sale of sweat equity shares by Sri Chand, the
cost of acquisition would be ` 3,00,000.
(I) Valuation of specified security, not being an equity share in a company
for the purpose of section 17(2)(vi) [Sub-rule (9)]
The fair market value of any specified security, not being an equity share in a
company, on the date on which the option is exercised by the employee, shall be
such value as determined by a merchant banker on the specified date.
For this purpose, “specified date” means,—
(i) the date of exercising of the option; or
(ii) any date earlier than the date of the exercising of the option, not being a date
which is more than 180 days earlier than the date of the exercising.
Tax on perquisite of specified securities and sweat equity shares is required to be
paid in the year of exercising of option. However, where such shares or securities
are allotted by the current employer, being an eligible start-up §, the perquisite is
taxable in the year
- after the expiry of 48 months from the end of the relevant assessment year
- in which sale of such security or share are made by the assessee
- in which the assessee ceases to be the employee of the employer,
whichever is earlier.
Definitions for the purpose of perquisite rules -
The following definitions are relevant for applying the perquisite valuation rules -
Term Meaning
Member of shall include-
household (a) spouse(s),
§
Referred to in section 80-IAC, which will be dealt with in detail at the Final level

SALARIES 3.99
(b) children and their spouses,

(c) parents, and
(d) servants and dependants;
Salary includes the pay, allowances, bonus or commission payable
monthly or otherwise or any monetary payment, by whatever
name called from one or more employers, as the case may be,
but does not include the following, namely:-
(a) dearness allowance or dearness pay unless it enters into the
computation of superannuation or retirement benefits of the
employee concerned;
(b) employer’s contribution to the provident fund account of the
employee;
(c) allowances which are exempted from payment of tax;
(d) the value of perquisites specified in clause (2) of section 17
of the Income-tax Act;
(e) any payment or expenditure specifically excluded under
proviso to clause (2) of section 17;
(f) lump-sum payments received at the time of termination of
service or superannuation or voluntary retirement, like gratuity,
severance pay, leave encashment, voluntary retrenchment
benefits, commutation of pension and similar payments;
ILLUSTRATION 23
X Ltd. provided the following perquisites to its employee Mr. Y for the P.Y. 2024-25 –
(1) Accommodation taken on lease by X Ltd. for ` 15,000 p.m. ` 5,000 p.m. is
recovered from the salary of Mr. Y.
(2) Furniture, for which the hire charges paid by X Ltd. is ` 3,000 p.m. No amount
is recovered from the employee in respect of the same.
(3) A car of 1,200 cc which is owned by X Ltd. and given to Mr. Y to be used both
for official and personal purposes. All running and maintenance expenses are
fully met by the employer. He is also provided with a chauffeur.
(4) A gift voucher of ` 10,000 on his birthday.
Compute the value of perquisites chargeable to tax for the A.Y.2025-26, assuming his
salary for perquisite valuation to be ` 10 lakh.

3.100 INCOME TAX LAW
SOLUTION
Computation of the value of perquisites chargeable to tax in the hands of
Mr. Y for the A.Y.2025-26
Particulars Amount in `
(1) Value of accommodation at
concessional rate
Actual amount of lease rental paid by 1,80,000
X Ltd.
10% of salary i.e., 10% of ` 10,00,000 1,00,000
Lower of the above 1,00,000
Less: Rent paid by Mr. Y (` 5,000 × 12) 60,000
40,000
Add: Hire charges paid by X Ltd. for
furniture provided for the use of Mr.
Y (` 3,000 × 12) 36,000 76,000
(2) Perquisite value of Santro car owned by
X Ltd. and provided to Mr. Y for his 32,400
personal and official use [(` 1,800 +
` 900) × 12]
(3) Value of gift voucher* 10,000
Value of perquisites chargeable to tax 1,18,400
* An alternate view possible is that only the sum in excess of ` 5,000 is taxable. In
such a case, the value of perquisite would be ` 5,000.
1.4 DEDUCTIONS FROM SALARY

The income chargeable under the head ‘Salaries’ is computed after making the
following deductions:
(1) Standard deduction [Section 16(ia)]
(2) Entertainment allowance [Section 16(ii)]

(3) Professional tax [Section 16(iii)]

SALARIES 3.101
Income under the head “Salaries” Amount Amount

(`) (`)
Salary/Bonus/Commission etc. A
Taxable Allowance B
Value of Taxable Perquisites C
Gross Salary (A+B+C) D
Less: Deductions under Section 16
Standard deduction [Upto ` 50,000 if the assessee xxx
exercises the option of shifting out of the default tax
regime provided under section 115BAC(1A) and upto
` 75,000 if the assessee is paying tax under default
tax regime provided under section 115BAC(1A)]
Entertainment Allowance to Government employee, xxx
if the assessee exercises the option of shifting out
of the default tax regime provided under section
115BAC(1A)
Professional Tax paid, if the assessee exercises the xxx E
option of shifting out of the default tax regime
provided under section 115BAC(1A)
Net taxable income from Salary (D-E) F
1.4.1 Standard Deduction

A standard deduction of ` 50,000 or the amount of salary, whichever is lower, is to
be provided to the employees if the assessee exercises the option of shifting out
of the default tax regime provided under section 115BAC(1A).
However, if the assessee is paying tax under default tax regime provided under section
115BAC(1A), standard deduction of ` 75,000 or the amount of salary, whichever is
lower, is to be provided to the employees.
1.4.2 Entertainment allowance

Entertainment allowance received is fully taxable and is first to be included in the
salary and thereafter the following deduction is to be made from gross salary.
However, deduction in respect of entertainment allowance is available in case of
Government employees only. The amount of deduction will be lower of:
(i) One-fifth of his basic salary or

(ii) ` 5,000 or
(iii) Entertainment allowance received.
Amount actually spent by the employee towards entertainment out of the
entertainment allowance received by him is not a relevant consideration at all.
Deduction in respect of entertainment allowance would be available to an
assessee only if he exercises the option of shifting out of the default tax
regime provided under section 115BAC(1A). The deduction would not be
available under the default tax regime i.e., under section 115BAC.
1.4.3 Professional tax on employment

Professional tax or taxes on employment levied by a State under Article 276 of the
Constitution is allowed as deduction only when it is actually paid by the employee
during the previous year. The total amount by way of professional tax payable in
respect of any one person shall not exceed ` 2,500 per annum. However, the
amount paid during the previous year can be more than ` 2,500 as the employee
may have paid the professional tax of an earlier year during the previous year.
• If professional tax is reimbursed or directly paid by the employer on
behalf of the employee, the amount so paid is first included as salary
income and then allowed as a deduction u/s 16.
• Deduction in respect of professional tax would be available to an assessee only
if he exercises the option of shifting out of the default tax regime provided under
section 115BAC(1A). The deduction would not be available under the default tax
regime i.e., under section 115BAC.
ILLUSTRATION 24
Mr. Goyal receives the following emoluments during the previous year ending
31.03.2025.
Basic pay ` 4,00,000
Dearness Allowance ` 1,50,000
Commission ` 1,00,000
Entertainment allowance ` 40,000
Medical expenses reimbursed ` 25,000
Professional tax paid ` 2,000 (` 1,000 was paid by his employer)

SALARIES 3.103
Mr. Goyal contributes ` 5,000 towards recognized provident fund. He has no other
income. Determine the income from salary for A.Y. 2025-26, if Mr. Goyal is a State
Government employee.
SOLUTION
Computation of salary of Mr. Goyal for the A.Y.2025-26
under default tax regime under section 115BAC
Particulars `
Basic Salary 4,00,000
Dearness Allowance 1,50,000
Commission 1,00,000
Entertainment Allowance received 40,000
Employee’s contribution to RPF [Note] -
Medical expenses reimbursed 25,000
Professional tax paid by the employer 1,000
Less: Deductions under section 16(ia) - Standard deduction of upto
` 75,000 75,000
Income from Salary 6,41,000
Note: Employee’s contribution to RPF is not taxable. It is eligible for deduction u/s
80C. However, such deduction shall not be available under the default tax regime
under section 115BAC.
Computation of salary of Mr. Goyal for the A.Y.2025-26 under the optional tax
regime (normal provisions of the Act)
Particulars ` `

Dearness Allowance 1,50,000
Commission 1,00,000
Entertainment Allowance received 40,000
Employee’s contribution to RPF [Note] -
Medical expenses reimbursed 25,000

Professional tax paid by the employer 1,000

Less: Deductions under section 16
under section 16(ia) - Standard deduction of upto 50,000
` 50,000
under section 16(ii) - Entertainment allowance being
lowest of :
(a) Allowance received 40,000
(b) One fifth of basic salary [1/5 × ` 4,00,000] 80,000
(c) Statutory amount 5,000 5,000
under section 16(iii) - Professional tax paid 2,000
Note: Employee’s contribution to RPF is not taxable. It is eligible for deduction u/s 80C.
1.5 RELIEF UNDER SECTION 89

(1) On account of arrears of salary or advance salary: Where by reason of any
portion of an assessee’s salary being paid in arrears or in advance or by
reason of his having received in any one financial year, salary for more than
twelve months or a payment of profit in lieu of salary under section 17(3), his
income is assessed at a rate higher than that at which it would otherwise have
been assessed, the Assessing Officer shall, on an application made to him in
this behalf, grant such relief as prescribed. The procedure for computing the
relief is given in Rule 21A.
(2) On account of family pension: Similar tax relief is extended to assessees

who receive arrears of family pension as defined in the Explanation to clause
(iia) of section 57.
“Family pension” means a regular monthly amount payable by the employer

to a person belonging to the family of an employee in the event of his death.
(3) No relief at the time of Voluntary retirement or termination of service:
No relief shall be granted in respect of any amount received or receivable by
an assessee on his voluntary retirement or termination of his service, in
accordance with any scheme or schemes of voluntary retirement or a scheme

SALARIES 3.105
of voluntary separation (in the case of a public sector company), if exemption

under section 10(10C) in respect of such compensation received on voluntary
retirement or termination of his service or voluntary separation has been
claimed by the assessee in respect of the same assessment year or any other
assessment year.
ILLUSTRATION 25
In the case of Mr. Hari, who turned 72 years on 28.3.2025, you are informed that the
salary (computed) for the previous year 2024-25 is ` 10,20,000 and arrears of salary
received is ` 3,45,000. Further, you are given the following details relating to the
earlier years to which the arrears of salary received is attributable to:
Previous year Taxable Salary (`) Arrears now received (`)

2010 – 2011 7,10,000 1,03,000
2011 – 2012 8,25,000 1,17,000
2012 – 2013 9,50,000 1,25,000
Compute the relief available under section 89 and the tax payable for the A.Y. 2025-26.
Assume that Mr. Hari exercises the option of shifting out of the default tax regime
Note: Rates of Taxes:
Assessment Slab rates of income-tax

Year
For resident individuals of the age For other resident individuals
of 60 years or more at any time
during the previous year
Slabs Rate Slabs Rate
2011–12 Upto ` 2,40,000 Nil Upto ` 1,60,000 Nil
` 2,40,001 - ` 5,00,000 10% ` 1,60,001 - ` 5,00,000 10%
` 5,00,001 - ` 8,00,000 20% ` 5,00,001 - ` 8,00,000 20%
Above ` 8,00,000 30% Above ` 8,00,000 30%
2012–13 Upto ` 2,50,000 Nil Upto ` 1,80,000 Nil
` 2,50,001 - ` 5,00,000 10% ` 1,80,001 - ` 5,00,000 10%
` 5,00,001 - ` 8,00,000 20% ` 5,00,001 - ` 8,00,000 20%
Above ` 8,00,000 30% Above ` 8,00,000 30%

Assessment Slab rates of income-tax

Year
For resident individuals of the age For other resident individuals
of 60 years or more at any time
during the previous year
Slabs Rate Slabs Rate
2013–14 Upto ` 2,50,000 Nil Upto ` 2,00,000 Nil
` 2,50,001 - ` 5,00,000 10% ` 2,00,001 - ` 5,00,000 10%
` 5,00,001 - ` 10,00,000 20% ` 5,00,001 - ` 10,00,000 20%
Above ` 10,00,000 30% Above ` 10,00,000 30%
Note – Education cess@2% and secondary and higher education cess@1% was attracted
on the income-tax for all above preceding years.
SOLUTION
Computation of tax payable by Mr. Hari for the A.Y.2025-26
Particulars Incl. arrears of Excl. arrears

salary of salary
` `
Current year salary (computed) 10,20,000 10,20,000
Add: Arrears of salary 3,45,000 -
Taxable Salary 13,65,000 10,20,000
Income-tax thereon 2,19,500 1,16,000
Add: Health and education cess @4% 8,780 4,640
Total payable 2,28,280 1,20,640
Computation of tax payable on arrears of salary if charged to tax in the

respective AYs
A.Y. 2011-12 A.Y. 2012-13 A.Y. 2013-14

Particulars Incl. Excl. Incl. Excl. Incl. Excl.
arrears arrears arrears arrears arrears arrears
(`) (`) (`) (`) (`) (`)
Taxable salary 7,10,000 7,10,000 8,25,000 8,25,000 9,50,000 9,50,000
Add: Arrears of 1,03,000 - 1,17,000 - 1,25,000 -
salary
Taxable salary 8,13,000 7,10,000 9,42,000 8,25,000 10,75,000 9,50,000

SALARIES 3.107
Tax on the above 97,900 76,000 1,34,600 99,500 1,47,500 1,15,000

Add: Cess@3% 2,937 2,280 4,038 2,985 4,425 3,450
Tax payable 1,00,837 78,280 1,38,638 1,02,485 1,51,925 1,18,450
Computation of relief under section 89
Particulars ` `
i Tax payable in A.Y.2025-26 on arrears:
Tax on income including arrears 2,28,280
Less : Tax on income excluding arrears 1,20,640 1,07,640
ii Tax payable in respective years on arrears :
Tax on income including arrears (` 1,00,837 + ` 1,38,638 3,91,400
+ ` 1,51,925)
Less: Tax on income excluding arrears (` 78,280 + 2,99,215 92,185
` 1,02,485 + ` 1,18,450)
Relief under section 89 - difference between tax on 15,455
arrears in A.Y. 2025-26 and tax on arrears in the
respective years
Tax payable for A.Y.2025-26 after relief under section 89
Particulars `
Income-tax payable on total income including arrears of salary 2,28,280

Less : Relief under section 89 as computed above 15,455
Tax payable after claiming relief 2,12,825

LET US RECAPITULATE
Basis of Charge [Section 15]

(i) Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever
is earlier.
(ii) However, where any salary, paid in advance, is assessed in the year of
payment, it cannot be subsequently brought to tax in the year in which it
becomes due.
(iii) If the salary paid in arrears has already been assessed on due basis, the same
cannot be taxed again when it is paid.
If an employee works with more than one employer, salaries received from all the
employers would be clubbed and brought to charge for the relevant previous year.
Taxability/Exemption of certain Allowances
Section Allowance Exemption
10(13A) House Rent Least of the following is exempt:
Allowance (a) HRA actually received
(b) Rent paid less 10% of salary
(c) 50% of salary, if accommodation is located
in Mumbai, Kolkata, Delhi or Chennai
40% of salary, if the accommodation is
located in any other city.
Note - Exemption would be available to an
assessee only if he exercises the option of shifting
out of the default tax regime provided under
section 115BAC(1A).
10(14)(ii) Children education ` 100 per month per child upto maximum of two
allowance children
Note - Exemption would be available to an
section 115BAC(1A).
Transport ` 3,200 per month for an employee who is blind
allowance for or deaf and dumb or orthopedically handicapped
commuting Note - Exemption in respect of transport
between the place allowance would be available to an assessee
of residence and irrespective of the regime under which he pays
the place of duty tax.

SALARIES 3.109
Hostel expenditure ` 300 per month per child up to a maximum of

of employee’s two children
children Note - Exemption would be available to an
section 115BAC(1A).
Exemption of Terminal Benefits [Exemption would be available to an assessee
irrespective of the tax regime under which he pays tax]
Section Component of Category of Particulars [Taxability / Exemption
salary employee under section 10]
10(10) Gratuity Central Fully exempt u/s 10(10)(i)
Government
employees/
Members of
Civil Services/
local
authority
employees
etc.
Other Least of the following is exempt:
employees (i) Gratuity actually received
In case of employees covered by the
Payment of Gratuity Act, 1972
(ii) 15/26 x last drawn salary x
number of completed years or
part in excess of six months
(iii) ` 20,00,000
In case of employees not covered
by the Payment of Gratuity Act,
1972
(ii) 1/2 x average salary of last 10
months x number of completed
years of service (fraction to be
ignored).
(iii) ` 20,00,000
10(10A) Pension
Uncommuted pension Government Fully taxable
& Non-
Government
employees

Commuted pension Employees of Fully exempt under section 10(10A)(i)

Central
Government/
local
authorities/
Statutory
corporation/
members of
Civil services/
All-India
services/
Defence
Services
Other If the employee is in receipt of
Employees gratuity
1/3 x (commuted pension received ÷
commutation %) x 100
If the employee is not in receipt of
gratuity
1/2 x (commuted pension received ÷
commutation %) x 100
10(10AA) Leave Salary
Received during service Government Fully taxable
& Non-
Government
Received at the time of Government Fully exempt u/s 10(10AA)(i)
retirement, (whether on Non- Least of the following is exempt :
superannuation or Government
otherwise) (i) ` 25,00,000
(ii) Leave salary actually received
(iii) Cash equivalent of leave standing
at the credit of the employee
[based on average salary of last 10
months] (maximum 30 days for
every year of service)
(iv) 10 months’ salary (based on
average salary of last 10 months
preceding retirement)
10(10B) Retrenchment Least of the following is exempt :
Compensation (i) Compensation actually
received

SALARIES 3.111
(ii) ` 5,00,000
(iii) 15 days average pay ×
Completed years of service and
part thereof in excess of 6
months
10(10C) Voluntary Retirement Central and Least of the following is exempt :
Compensation State (i) Compensation actually
Government, received
Public sector
company, any (ii) ` 5,00,000
other (iii) 3 months’ salary x completed
company, years of service
local (iv) Last drawn salary x remaining
authority, co- months of services left
operative
society, IIT etc.
Section 10(5) [Leave Travel Concession]
Exemption is available for 2 trips in a block of 4 calendar years. Exemption would be
available to an assessee only if he exercises the option of shifting out of the default tax
S. No. Journey performed by Exemption
1 Air Amount not exceeding air economy fare by
the shortest route.
2 Any other mode :
(i) Where rail service is Amount not exceeding air-conditioned first-
available class rail fare by the shortest route to the
place of destination
(ii) Where rail service is not
available
a) and public transport Amount equivalent to air conditioned first
does not exist class rail fares by the shortest route, as if the
journey had been performed by rail
b) but public transport Amount not exceeding the first class or deluxe
exists. class fare by the shortest route to the place of
destination
Provident Funds - Exemption & Taxability provisions
Particulars Recognized PF Unrecognized Statutory PF Public PF
PF
Employer’s Contribution in Not taxable at Fully exempt N.A. (as
excess of 12% of the time of there is only

Contribution salary is taxable as contribution assessee’s

“salary” u/s 17(1) own
contribution)
Employee’s Eligible for Not eligible for Eligible for Eligible for
Contribution deduction u/s 80C, deduction deduction u/s deduction
where an employee 80C, where an u/s 80C,
exercises the employee where an
option of shifting exercises the employee
out of the default option of exercises the
tax regime shifting out of option of
provided under the default shifting out
section 115BAC(1A) tax regime of the
provided default tax
under section regime
115BAC(1A) provided
under
section
115BAC(1A)
Interest Credited Amount in excess Not taxable at Fully exempt N.A.
on Employer’s of 9.5% p.a. is the time of
Contribution taxable as “salary” credit of
u/s 17(1) interest
Interest Credited Amount in excess Not taxable at Exempt upto Fully exempt
on Employee’s of 9.5% p.a. is the time of certain limit
Contribution taxable as “salary” credit of of
u/s 17(1) [See Note interest contribution
below] [See Note
below]
Amount Exempt from tax if Employer’s Fully exempt Fully exempt
withdrawn on (i) employee served contribution u/s 10(11) u/s 10(11)
retirement/ a continuous and interest
termination period of 5 years thereon is
or more; or taxable as
(ii) retires before salary.
rendering 5 Employee’s
years of service contribution is
because of ill not taxable.
health, Interest on
contraction or employee’s
discontinuance contribution is
of employer’s taxable under
business or income from
reason beyond other source.

SALARIES 3.113
the control of
the employee; or
(iii) on cessation
of employment,
the employee
obtains
employment
with any other
employer, to the
extent the
accumulated
balance in RPF is
transferred to his
RPF account
maintained by
the new
employer.
(iv) The entire
balance standing
to the credit of
the employee is
transferred to his
NPS account
referred to in
section 80CCD
and notified by
the Central
Government
In other cases, it
will be taxable.
As per section 10(11), any payment from a Provident Fund (PF) to which Provident Fund
Act, 1925, applies or from Public Provident Fund would be exempt.
Accumulated balance due and becoming payable to an employee participating in a

Recognized Provident Fund (RPF) would be exempt under section 10(12).
However, the exemption under section 10(11) or 10(12) would not be available in respect
of income by way of interest accrued during the previous year to the extent it relates to
the amount or the aggregate of amounts of contribution made by that
person/employee exceeding ` 2,50,000 in any previous year in that fund, on or after 1 st
April, 2021.

If the contribution by such person/employee is in a fund in which there is no employer’s

contribution, then, a higher limit of ` 5,00,000 would be applicable for such contribution,
and interest accrued in any previous year in that fund, on or after 1 st April, 2021 would
be exempt upto that limit.
It may be noted that interest accrued on contribution to such funds upto 31 st March,
2021 would be exempt without any limit, even if the accrual of income is after that date.
Valuation of Perquisites [Section 17(2) read with Rule 3]

(I) Rent-free residential accommodation/ Accommodation provided to an
employee at concessional rate
S. No. Category of Unfurnished accommodation Furnished
(A) Employee accommodation
(B) (C) (D)
1 Government License fee determined as per Value determined
employee Government rules as reduced by the under column (C)
rent actually paid by the employee.
Add: 10% p.a. of the
furniture cost.
However, if the
furniture is hired,
then hire charges
payable/paid should
be added to the
value determined
under column (C),
as reduced by
charges recovered
from employee.
2 Non- Where accommodation is owned Value determined
government by employer under column (C)
employee Add: 10% p.a. of the
Location Perquisite
value furniture cost.
In cities having a 10% of salary

population > 40
However, if the
lakhs as per 2011
furniture is hired,
census
then hire charges
In cities having a 7.5% of salary payable/paid should
population > 15 be added to the value
lakhs ≤ 40 lakhs

SALARIES 3.115
as per 2011 determined under

census column (C),
as reduced by
In other areas 5% of salary
charges recovered
The perquisite value should be from employee.
arrived at by reducing the rent, if any,
actually paid by the employee, from
the above value.
Where the accommodation is taken Value determined

on lease or rent by employer under column (C)
Lower of the following is taxable: Add: 10% p.a. of the
(a) actual amount of lease rent paid furniture cost.
or payable by employer or However, if the
(b) 10% of salary furniture is hired, then
The lower of the above should be hire charges
reduced by the rent, actually paid by payable/paid should
the employee, to arrive at the be added to the value
perquisite value. determined under
column (C),
as reduced by
charges recovered
from employee.
(II) Interest free or concessional loan
In respect of any loan given by employer to employee or any member of his household
(excluding for medical treatment for specified ailments or where loans amount in
aggregate does not exceed ` 20,000), the interest at the rate charged by SBI as on the
first day of the relevant previous year at maximum outstanding monthly balance
(aggregate outstanding balance for each loan as on the last day of each month) as
reduced by the interest, if any, actually paid by him or any member of his household.
(III) Use of movable assets by employee/ any member of his household
Asset given Value of benefit
(a) Use of laptops and Nil
computers
(b) Movable assets, other 10% p.a. of the actual cost of such asset, or the
than - amount of rent or charge paid, or payable by the
(i) laptops and employer, as the case may be
computers; and (-)
(ii) assets already Amount paid by/ recovered from an
specified employee

(IV) Transfer of movable assets

Actual cost of asset to employer (-) cost of normal wear and tear (-) amount paid or
recovered from employee
Assets transferred Value of perquisite
Computers and electronic items @50% on WDV for each completed year of usage
Motor cars @20% on WDV for each completed year of usage
Any other asset @10% of actual cost of such asset to employer for
each completed year of usage [on SLM basis]
(V) Motor car
S. No. Car Expenses Wholly Partly personal use (c)
owned/ met by official use
hired by
1 Employer Employer Not a
perquisite* cc of engine Perquisite value
upto 1.6 litres ` 1,800 p.m.

above 1.6 litres ` 2,400 p.m.
2 Employee Employer Not a Actual amount of expenditure
perquisite* incurred by the employer as reduced
by the perquisite value arrived at in
(1) above.
3 Employer Employee -
cc of engine Perquisite value
upto 1.6 litres ` 600 p.m.
above 1.6 litres ` 900 p.m.
If chauffeur is also provided, ` 900
p.m. should be added to the above
value.
* Provided employer maintains the complete details of such journey and expenditure thereon
and gives a certificate that such expenditure are incurred wholly for official use.
Note: Where car is owned by employer and expenses are also met by the employer, the
taxable perquisites in case such car is used wholly for personal purposes of the
employee would be equal to the actual expenditure incurred by the employer on
running and maintenance expenses and normal wear and tear (calculated @10% p.a. of
actual cost of motor car) less amount charged from the employee for such use.

SALARIES 3.117
Meaning of Salary:
S. No. Calculation of exemption of Meaning of salary
Allowance/Terminal benefit/Valuation
of perquisite
1 Gratuity Basic salary and dearness
(in case of non-Government employees allowance.
covered by the Payment of Gratuity Act,
1972)
2 a) Gratuity (in case of non- Government Basic salary and dearness
employee not covered by Payment of allowance, if provided in terms
Gratuity Act, 1972) of employment, and
b) Leave Salary commission calculated as a
fixed percentage of turnover.
c) House Rent Allowance
d) Recognized Provident Fund
e) Voluntary Retirement Compensation
3 Rent free accommodation and All pay, allowance, bonus or
Accommodation provided to an employee commission or any monetary
at a concessional rate payment by whatever name
called but excludes-
(1) Dearness allowance not
forming part of
computation of
superannuation or
retirement benefit
(2) employer’s contribution to
the provident fund
account of the employee;
(3) allowances which are
exempted from the
payment of tax;
(4) value of the perquisites
specified in section 17(2);
(5) any payment or
expenditure specifically
excluded under the
proviso to section 17(2)
i.e., payment of medical
insurance premium
specified therein.

(6) lump-sum payments

received at the time of
termination of service or
superannuation or
voluntary retirement, like
gratuity, leave
encashment, voluntary
retirement benefits,
commutation of pension
and similar payments.
Deductions from gross salary [Section 16]
(1) Standard deduction [Section 16(ia)]
Standard deduction of upto ` 75,000 under default tax regime under section
115BAC.
Standard deduction of upto ` 50,000 under normal provisions of the Act.
(2) Entertainment allowance (allowable only in the case of government
employees) [Section 16(ii)]
Least of the following is allowed as deduction:
(1) ` 5,000
(2) 1/5th of basic salary
(3) Actual entertainment allowance received
Note - Deduction would be available to an assessee only if he exercises the
115BAC(1A).
(3) Professional tax [Section 16(iii)]
Any sum paid by the assessee on account of tax on employment is allowable
as deduction.
In case professional tax is paid by employer on behalf of employee, the amount
paid shall be included in gross salary as a perquisite and then deduction can be
claimed.
Note - Deduction would be available to an assessee only if he exercises the
115BAC(1A).
Relief when salary is paid in arrears or in advance [Section 89]
Step 1 Calculate tax payable of the previous year in which the arrears/advance salary
is received by considering:
(a) Total Income inclusive of additional salary
(b) Total Income exclusive of additional salary
Step 2 Compute the difference the tax calculated in Step 1 and Step 2 [i.e., (a) – (b)]

SALARIES 3.119
Step 3 Calculate the tax payable of every previous year to which the additional salary
relates:
(a) On total income including additional salary of that particular previous
year
(b) On total income excluding additional salary.
Step 4 Calculate the difference between (a) and (b) in Step 3 for every previous year
to which the additional salary relates and aggregate the same.
Step 5 Relief under section 89(1) = Amount calculated in Step 2 – Amount calculated
in Step 4

TEST YOUR KNOWLEDGE
1. Mr. Mohit is employed with XY Ltd. on a basic salary of ` 10,000 p.m. He is also
entitled to dearness allowance @100% of basic salary, 50% of which is included
in salary as per terms of employment. The company gives him house rent
allowance of ` 6,000 p.m. which was increased to ` 7,000 p.m. with effect from
01.01.2025. He also got an increment of ` 1,000 p.m. in his basic salary with
effect from 01.02.2025. Rent paid by him during the P.Y.2024-25 is as under:
April and May, 2024- Nil, as he stayed with his parents
June to October, 2024 - ` 6,000 p.m. for an accommodation in Ghaziabad
November, 2024 to March, 2025 - ` 8,000 p.m. for an accommodation in Delhi
Compute his gross salary for A.Y.2025-26, assuming he exercises the option of
shifting out of the default tax regime provided under section 115BAC(1A).
2. Ms. Rakhi is an employee in a private company. She receives the following
medical benefits from the company during the previous year 2024-25:
Particulars `
1 Reimbursement of following medical expenses incurred
by Ms. Rakhi
(A) On treatment of her self-employed daughter in a 4,000
private clinic
(B) On treatment of herself by family doctor 8,000
(C) On treatment of her mother-in-law dependent on 5,000
her, in a nursing home
2 Payment of premium on Mediclaim Policy taken on her 7,500
health
3 Medical Allowance 2,000 p.m.
4 Medical expenses reimbursed on her son's treatment in 5,000
a government hospital
5 Expenses incurred by company on the treatment of her 1,05,000
minor son abroad including stay expenses

SALARIES 3.121
6 Expenses in relation to foreign travel of Rakhi and her 1,20,000

son for medical treatment
Note - Limit prescribed by RBI for expenditure on
medical treatment and stay abroad is USD 2,50,000 per
financial year under liberalized remittance scheme.
Examine the taxability of the above benefits and allowances in the hands of
Rakhi.
3. Mr. X is employed with AB Ltd. on a monthly salary of ` 25,000 per month and
an entertainment allowance and commission of ` 1,000 p.m. each. The
company provides him with the following benefits:
(i) A company owned accommodation is provided to him in Delhi. Furniture
costing ` 2,40,000 was provided on 1.8.2024.
(ii) A personal loan of ` 5,00,000 on 1.7.2024 on which it charges interest @
6.75% p.a. The entire loan is still outstanding (Assume SBI rate of interest
on 1.4.2024 was 12.75% p.a.)
(iii) His son is allowed to use a motor cycle belonging to the company. The
company had purchased this motor cycle for ` 60,000 on 1.5.2021. The
motor cycle was finally sold to him on 1.8.2024 for ` 30,000.
(iv) Professional tax paid by Mr. X is ` 2,000.
Compute the income from salary of Mr. X for the A.Y. 2025-26 assuming Mr. X
exercises the option of shifting out of the default tax regime provided under
section 115BAC(1A).
4. Mr. Balaji, employed as Production Manager in Beta Ltd., furnishes you the
following information for the year ended 31.03.2025:
(i) Basic salary upto 31.10.2024 ` 50,000 p.m.
Basic salary from 01.11.2024 ` 60,000 p.m.
Note - Salary is due and paid on the last day of every month.
(ii) Dearness allowance @ 40% of basic salary.
(iii) Bonus equal to one month salary. Paid in October 2024 on basic salary
plus dearness allowance applicable for that month.

(iv) Contribution of employer to recognized provident fund account of the

employee@16% of basic salary.
(v) Professional tax paid ` 2,500 of which ` 2,000 was paid by the employer.
(vi) Facility of laptop and computer was provided to Balaji for both official
and personal use. Cost of laptop ` 45,000 and computer ` 35,000 were
acquired by the company on 01.12.2024.
(vii) Motor car owned by the employer (cubic capacity of engine exceeds 1.60
litres) provided to the employee from 01.11.2024 meant for both official
and personal use. Repair and running expenses of ` 45,000 from
01.11.2024 to 31.03.2025, were fully met by the employer. The motor car
was self-driven by the employee.
(viii) Leave travel concession given to employee, his wife and three children
(one daughter aged 7 and twin sons aged 3). Cost of air tickets (economy
class) reimbursed by the employer ` 30,000 for adults and ` 45,000 for
three children. Balaji is eligible for availing exemption this year to the
extent it is permissible in law.
Compute the salary income chargeable to tax in the hands of Mr. Balaji for the
A.Y. 2025-26 assuming he exercises the option of shifting out of the default tax
5. From the following details, find out the salary chargeable to tax for the
A.Y.2025-26 assuming he exercises the option of shifting out of the default tax
regime provided under section 115BAC(1A) -
Mr. X is a regular employee of Rama & Co., in Gurgaon. He was appointed on
1.1.2024 in the scale of ` 20,000 - ` 1,000 - ` 30,000. He is paid 10% D.A. &
Bonus equivalent to one month pay based on salary of March every year. He
contributes 15% of his pay and D.A. towards his recognized provident fund and
the company contributes the same amount. DA forms part of pay for retirement
benefits.
He is provided free housing facility which has been taken on rent by the
company at ` 10,000 per month. He is also provided with following facilities:
(i) Facility of laptop costing ` 50,000.
(ii) Company reimbursed the medical treatment bill of his brother of
` 25,000, who is dependent on him.

SALARIES 3.123
(iii) The monthly salary of ` 1,000 of a house keeper is reimbursed by the

company.
(iv) A gift voucher of ` 10,000 on the occasion of his marriage anniversary.

(v) Conveyance allowance of ` 1,000 per month is given by the company
towards actual reimbursement of conveyance spent on official duty.
(vi) He is provided personal accident policy for which premium of ` 5,000 is

paid by the company.
(vii) He is getting telephone allowance @` 500 per month.
6. You are required to compute the income from salary of Mr. Raja under default
tax regime from the following particulars for the year ended
31-03-2025:
(i) He retired on 31-12-2024 at the age of 60, after putting in 25 years and
9 months of service, from a private company at Delhi.
(ii) He was paid a salary of ` 25,000 p.m. and house rent allowance of
` 6,000 p.m. He paid rent of ` 6,500 p.m., during his tenure of service.
(iii) On retirement, he was paid a gratuity of ` 3,50,000. He was covered by
the payment of Gratuity Act, 1972. He had not received any other gratuity
at any point of time earlier, other than this gratuity.
(iv) He had accumulated leave of 15 days per annum during the period of his
service; this was encashed by him at the time of his retirement. A sum of
` 3,15,000 was received by him in this regard. Employer allowed 30 days
leave per annum.
(v) He is receiving ` 5,000 as pension. On 1.2.2025, he commuted 60% of his
pension and received ` 3,00,000 as commuted pension.
(vi) The company presented him with a gift voucher of ` 5,000 on his
retirement. His colleagues also gifted him a mobile phone worth
` 50,000 from their own contribution.
7. Ms. Akansha, a salaried employee, furnishes the following details for the
financial year 2024-25:
Particulars `
Basic salary 6,20,000

Dearness allowance 4,20,000

Commission 75,000
Entertainment allowance 9,000
Medical expenses reimbursed by the employer 18,000
Profession tax (of this, 50% paid by employer) 4,000
Health insurance premium paid by employer 8,000
Gift voucher given by employer on her birthday 10,000
Life insurance premium of Akansha paid by employer 26,000
Laptop provided for use at home. Actual cost of Laptop to
employer 45,000
Children of the assessee are also using the Laptop at home]
Employer company owns a Maruti Suzuki Swift car, which was
provided to the assessee, both for official and personal use.
Driver was also provided. (Engine cubic capacity more than 1.6
litres). All expenses are met by the employer
Annual credit card fees paid by employer [Credit card is not
exclusively used for official purposes; details of usage are not 7,000
available]
You are required to compute the income chargeable under the head Salaries
for the assessment year 2025-26 if she pays tax under default tax regime.
ANSWERS
1. Computation of gross salary of Mr. Mohit for A.Y. 2025-26
Particulars `
Basic salary [(` 10,000 × 10) + (` 11,000 × 2)] 1,22,000

Dearness Allowance (100% of basic salary) 1,22,000
House Rent Allowance (See Note below) 21,300

SALARIES 3.125
Note: Computation of Taxable House Rent Allowance (HRA)

Particulars April-May June-Oct Nov-Dec Jan Feb-March
(`) (`) (`) (`) (`)
Basic salary per month 10,000 10,000 10,000 10,000 11,000
Dearness allowance
(included in salary as
per terms of
employment) (50% of 5,000 5,000 5,000 5,000 5,500
basic salary)
Salary per month for
the purpose of
computation of house 15,000 15,000 15,000 15,000 16,500
rent allowance
Relevant period (in 2 5 2 1 2
months
Salary for the relevant
period (Salary per
month × relevant 30,000 75,000 30,000 15,000 33,000
period)
Rent paid for the Nil 30,000 16,000 8,000 16,000
relevant period (` 6,000×5) (` 8,000×2) (` 8,000×1) (` 8,000×2)
House rent allowance 12,000 30,000 12,000 7,000 14,000
(HRA) received during (` 6,000×2) (` 6,000×5) (` 6,000×2) (` 7,000×1) (` 7,000×2)
the relevant period (A)
Least of the following N.A.
is exempt [u/s
10(13A)]
1. Actual HRA - 30,000 12,000 7,000 14,000
received
2. Rent paid (–) 10% - 22,500 13,000 6,500 12,700
of salary
3. 40% of salary - 30,000 15,000 7,500 16,500
(Residence at (40% × (50% × (50% × (50% ×
Ghaziabad – June to ` 75,000) ` 30,000) ` 15,000) ` 33,000)
Oct, 2024)
50% of salary
(Residence at Delhi–
Nov, 24 - March, 25)
Exempt HRA (B) Nil 22,500 12,000 6,500 12,700

Taxable HRA [Actual

HRA (–) Exempt HRA] 12,000 7,500 Nil 500 1,300
(A-B)
Taxable HRA (total) = ` 12,000 + ` 7,500 + ` 500 + ` 1,300 = ` 21,300
2. Tax treatment of medical benefits, allowances and mediclaim premium in

the hands of Ms. Rakhi for A.Y. 2025-26
Particulars
1. Reimbursement of medical expenses incurred by Ms. Rakhi
(A) The amount of ` 4,000 reimbursed by her employer for
treatment of her self-employed daughter in a private clinic is
taxable perquisite.
(B) The amount of ` 8,000 reimbursed by the employer for
treatment of Ms. Rakhi by family doctor is taxable perquisite.
(C) The amount of ` 5,000 reimbursed by her employer for
treatment of her dependant mother-in-law in a nursing home
is taxable perquisite.
The aggregate sum of ` 17,000, specified in (A), (B) and (C) above,
reimbursed by the employer is taxable perquisite
2. Medical insurance premium of ` 7,500 paid by the employer for
insuring health of Ms. Rakhi is a tax free perquisite as per clause (iii)
of the first proviso to section 17(2).
3. Medical allowance of ` 2,000 per month i.e., ` 24,000 p.a. is a fully
taxable allowance.
4. As per clause (ii)(a) of the first proviso to section 17(2), reimbursement
of medical expenses of ` 5,000 on her son’s treatment in a hospital
maintained by the Government is a tax-free perquisite.
5. As per clause (vi) of the first proviso to section 17(2), the following
& expenditure incurred by the employer would be excluded from
6. perquisite subject to certain conditions –
(i) Expenditure on medical treatment of the employee, or any
member of the family of such employee, outside India including
stay expenses [` 1,05,000, in this case];
(ii) Expenditure on travel of the employee or any member of the
family of such employee for medical treatment and one
attendant who accompanies the patient in connection with such
treatment [` 1,20,000, in this case].

SALARIES 3.127
The conditions subject to which the above expenditure would be

exempt are as follows –
(i) The expenditure on medical treatment and stay abroad would be
excluded from perquisite to the extent permitted by Reserve Bank
of India;
(ii) The expenditure on travel would be excluded from perquisite
only in the case of an employee whose gross total income, as
computed before including the said expenditure, does not
exceed ` 2 lakh.
Since the expenditure on medical treatment and stay abroad does
not exceed the limit permitted by RBI, they would be fully exempt.
However, the foreign travel expenditure of Ms. Rakhi and her minor
son borne by the employer would be excluded from perquisite only
if the gross total income of Ms. Rakhi, as computed before including
the said expenditure, does not exceed ` 2 lakh.
3. Computation of Income from Salary of Mr. X for the A.Y. 2025-26
Particulars ` `
Basic salary [` 25,000 × 12] 3,00,000

Commission [` 1,000 × 12] 12,000
Entertainment allowance [` 1,000 × 12] 12,000
Rent free accommodation [Note 1] 32,400
Add : Value of furniture [` 2,40,000 × 10% p.a. for 8 16,000 48,400
months]
Interest on personal loan [Note 2] 22,500
Use of motor cycle [` 60,000 × 10% p.a. for 4 months] 2,000
Transfer of motor cycle [Note 3] 12,000
Less : Deduction under section 16
Under section 16(ia) – Standard deduction 50,000
Under section 16(iii) - Professional tax paid 2,000 52,000

Notes:
1. Value of rent-free unfurnished accommodation
= 10% of salary for the relevant period
= 10% of (` 3,00,000 + ` 12,000 + ` 12,000) = ` 32,400
2. Value of perquisite for interest on personal loan
= [` 5,00,000 × (12.75% - 6.75%) for 9 months] = ` 22,500
3. Depreciated value of the motor cycle
= Original cost – Depreciation @ 10% p.a. for 3 completed years.
= ` 60,000 – (` 60,000 × 10% p.a. × 3 years) = ` 42,000.
Perquisite = ` 42,000 – ` 30,000 = ` 12,000.
4. Computation of Taxable Salary of Mr. Balaji for A.Y. 2025-26
Particulars `
Basic salary [(` 50,000 × 7) + (` 60,000 × 5)] 6,50,000

Dearness Allowance (40% of basic salary) 2,60,000
Bonus (` 50,000 + 40% of ` 50,000) (See Note 1) 70,000
Employers contribution to recognised provident fund in
excess of 12% of salary = 4% of ` 6,50,000 (See Note 2) 26,000
Professional tax paid by employer 2,000
Perquisite of Motor Car (` 2,400 for 5 months) (See Note 4) 12,000
Standard deduction u/s 16(ia) ` 50,000
Professional tax u/s 16(iii) (See Note 6) ` 2,500 52,500
Taxable Salary 9,67,500
Notes:
1. Since bonus was paid in the month of October, the basic salary of
` 50,000 for the month of October is considered for its calculation.

SALARIES 3.129
2. It is assumed that dearness allowance does not form part of salary for
computing retirement benefits.
3. As per Rule 3(7)(vii), facility of use of laptop and computer is a tax free
perquisite, whether used for official or personal purpose or both.
4. As per the provisions of Rule 3(2), in case a motor car (engine cubic
capacity exceeding 1.60 liters) owned by the employer is provided to
the employee without chauffeur for personal as well as office use, the
value of perquisite shall be ` 2,400 per month. The car was provided to
the employee from 01.11.2024, therefore the perquisite value has been
calculated for 5 months.
5. Mr. Balaji can avail exemption under section 10(5) on the entire amount
of ` 75,000 reimbursed by the employer towards Leave Travel
Concession since the same was availed for himself, his wife and three
children and the journey was undertaken by economy class airfare. The
restriction imposed for two children is not applicable in case of multiple
births which take place after the first child.
It is assumed that the Leave Travel Concession was availed for journey
within India.
He is eligible to claim benefit of exemption u/s 10(5) since he has
exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A).
6. As per section 17(2)(iv), a “perquisite” includes any sum paid by the
employer in respect of any obligation which, but for such payment,
would have been payable by the assessee. Therefore, professional tax
of ` 2,000 paid by the employer is taxable as a perquisite in the hands
of Mr. Balaji. As per section 16(iii), a deduction from the salary is
provided on account of tax on employment i.e. professional tax paid
during the year.
Therefore, in the present case, the professional tax paid by the employer
on behalf of the employee ` 2,000 is first included in the salary and
deduction of the entire professional tax of ` 2,500 is provided from
salary.

5. Computation of taxable salary of Mr. X for A.Y. 2025-26
Particulars `
Basic pay [(` 20,000×9) + (` 21,000×3)] = ` 1,80,000 + 2,43,000
` 63,000
Dearness allowance [10% of basic pay] 24,300
Bonus 21,000
Employer’s contribution to Recognized Provident Fund in
excess of 12% (15%-12% =3% of ` 2,67,300) [See Note 1 8,019
below]
Taxable allowances
Telephone allowance 6,000
Taxable perquisites
Rent-free accommodation [See Note 1 & 2 below] 29,430
Medical reimbursement 25,000
Reimbursement of salary of housekeeper 12,000
Gift voucher [See Note 5 below] 10,000
Less: Deduction under section 16(ia) – Standard deduction 50,000
Salary income chargeable to tax 3,28,749
Notes:
1. Since dearness allowance forms part of salary for retirement benefits,
the perquisite value of rent-free accommodation and employer’s
contribution to recognized provident fund have been accordingly
worked out.
2. Where the accommodation is taken on lease or rent by the employer,
the value of rent-free accommodation provided to employee would be
actual amount of lease rental paid or payable by the employer or 10%
of salary, whichever is lower.
For the purposes of valuation of rent free house, salary includes:

(i) Basic salary i.e., ` 2,43,000
(ii) Dearness allowance i.e. ` 24,300

SALARIES 3.131
(iii) Bonus i.e., ` 21,000

(iv) Telephone allowance i.e., ` 6,000
Therefore, salary works out to
` 2,43,000 + ` 24,300 + ` 21,000 + ` 6,000 = ` 2,94,300.
10% of salary = ` 2,94,300 × 10/100 = ` 29,430
Value of rent-free house = Lower of rent paid by the employer (i.e.
` 1,20,000) or 10% of salary (i.e., ` 29,430).
Therefore, the perquisite value is ` 44,145.
3. Facility of use of laptop is not a taxable perquisite.
4. Conveyance allowance is exempt since it is based on actual
reimbursement for official purposes.
5. The value of any gift or voucher or token in lieu of gift received by the
employee or by member of his household below ` 5,000 in aggregate
during the previous year is exempt. In this case, the gift voucher was
received on the occasion of marriage anniversary and the sum exceeds
the limit of ` 5,000.
Note - An alternate view possible is that only the sum in excess of
` 5,000 is taxable. In such a case, the value of perquisite would be
` 5,000.
6. Premium of ` 5,000 paid by the company for personal accident policy
is not liable to tax.
6. Computation of income under the head “Salaries”

of Mr. Raja for the A.Y.2025-26 under default tax regime
Particulars ` `
Basic Salary = ` 25,000 x 9 months 2,25,000
House Rent Allowance = ` 6,000 x 9 months 54,000
[Fully taxable under default tax regime]
Gratuity 3,50,000

Less: Least of the following exempt under section

10(10)(ii) 3,50,000 Nil
(i) Actual Gratuity received ` 3,50,000
(ii) 15 days salary for every year of completed
service [15/26 x ` 25,000 x 26] =` 3,75,000
(iii) Notified limit = ` 20,00,000
Leave encashment 3,15,000
Less: Least of the following exempt under section
10(10AA) 2,50,000 65,000
(i) ` 25,00,000
(ii) Leave salary actually received ` 3,15,000
(iii) ` 2,50,000, being 10 months’ salary x
` 25,000
(iv) Cash equivalent of leave standing at the credit
of the employee based on the average salary
of last 10 months’ (max. 30 days per year of
service) for every year of actual service
rendered for the employer from whose service
he has retired
375/30 x ` 25,000 = ` 3,12,500
[Leave Due = Leave allowed – Leave taken]
= 750 (30 days per year × 25 years) – 375 days
(15 days x 25)
= 375 days]
Uncommuted Pension received [` 5,000 x 1) + 9,000
(` 5,000 x 2 x 40%)
Commuted Pension received 3,00,000
Less: Exempt under section 10(10A)
1/3 x ` 3,00,000/60% x 100%) 1,66,667 1,33,333
Gift Voucher [As per Rule 3(7)(iv), the value of any Nil
gift or voucher or token in lieu of gift received by
the employee or by member of his household not
exceeding ` 5,000 in aggregate during the
previous year is exempt]

SALARIES 3.133
Mobile Phone received as gift from colleagues Nil

(Neither taxable under the head “Salaries” nor
“Income from other sources”, since taxability
provisions under section 56(2)(x) are not attracted
in respect of mobile phone received from
colleagues, as mobile phone is not included in the
definition of “property” thereunder)
Less: Standard deduction u/s 16 [Actual salary or 75,000
` 75,000, whichever is less] [Allowable under
default tax regime]
Net Salary 4,11,333
7. Computation of income chargeable under the head “Salaries”

of Ms. Akansha for A.Y.2025-26 under default tax regime
Particulars `
Dearness allowance 4,20,000
Commission 75,000
Entertainment allowance 9,000
Medical expenses reimbursed by the employer is fully taxable 18,000
Professional tax paid by the employer is a taxable perquisite 2,000
as per section 17(2)(iv), since it is an obligation of the
employee which is paid by the employer
Health insurance premium of ` 8,000 paid by the employer is Nil
an exempt perquisite [Clause (iii) of proviso to section 17(2)]
Gift voucher given by employer on Ms. Akansha birthday 10,000
(entire amount is taxable since the perquisite value exceeds
` 5,000) as per Rule 3(7)(iv)
Life insurance premium of Ms. Akansha paid by employer is 26,000
a taxable perquisite as per section 17(2)(v)
Laptop provided for use at home is an exempt perquisite as Nil
per Rule 3(7)(vii)
Provision of motor car with driver (engine cubic capacity
more than 1.6 litres) owned by employer to employee, the 39,600

perquisite value would be ` 39,600 [` (2,400+ 900) ×12] as

per Rule 3(2)
Annual credit card fees paid by employer is a taxable
perquisite as per Rule 3(7)(v) since the credit card is not
exclusively used for official purposes and details of usage are 7,000
not available
Less: Deductions under section 16
- Standard Deduction as per section 16(ia) 75,000
Income chargeable under the head “Salaries” 11,51,600
Note: As per Rule 3(7)(iv), the value of any gift or voucher received by the
employee or by member of his household on ceremonial occasions or
otherwise from the employer shall be determined as the sum equal to the
amount of such gift. However, the value of any gift or voucher received by
the employee or by member of his household below ` 5,000 in aggregate
during the previous year would be exempt as per the proviso to Rule 3(7)(iv).
In this case, the gift voucher of ` 10,000 was received by
Ms. Akansha from her employer on the occasion of her birthday.
Since the value of the gift voucher exceeds the limit of ` 5,000, the entire
amount of ` 10,000 is liable to tax as perquisite. The above solution has
been worked out accordingly.
An alternate view possible is that only the sum in excess of ` 5,000 is taxable
in view of the language of Circular No.15/2001 dated 12.12.2001, which
states that such gifts upto ` 5,000 in the aggregate per annum would be
exempt, beyond which it would be taxed as a perquisite. As per this view,
the value of perquisite would be ` 5,000. Accordingly, the gross salary and
net salary would be ` 12,21,600 and ` 11,46,600, respectively.

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CHAPTER

© The Institute of Chartered Accountants of India

Proforma for computation of income under the head “Salaries” as per

© The Institute of Chartered Accountants of India

II) Where the accommodation is provided by any

© The Institute of Chartered Accountants of India

(f) Value of use of motor car [Refer Table below] xxx

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(v) Taxable Perquisites

© The Institute of Chartered Accountants of India

- in NPS referred to in section 80CCD(1)

© The Institute of Chartered Accountants of India

(5) Free food and non-alcoholic beverages: Expenses

© The Institute of Chartered Accountants of India

(xii) Retrenchment compensation etc. xxx

Proforma for computation of income under the head “Salaries” under

© The Institute of Chartered Accountants of India

PERQUISITE VALUE OF MOTOR CAR

© The Institute of Chartered Accountants of India

Perquisite value of motor car is taxable only in case of specified employees

Before learning the provisions, it is essential to understand the important concepts

© The Institute of Chartered Accountants of India

Example: Sujata, an actress, is employed in Chopra Films, where she is paid a

Example: Remuneration received by a Member of Parliament/State Legislature

(2) Full-time or part-time employment: Once the relationship of employer and

© The Institute of Chartered Accountants of India

(4) Surrender of salary: However, if an employee surrenders his salary, in the

© The Institute of Chartered Accountants of India

If an employee is paid pension abroad in respect of services rendered in India,

(b) The above-mentioned members of the staff should be the subjects

(a) The foreign enterprise is not engaged in any business or trade in

© The Institute of Chartered Accountants of India

(c) The remuneration is not liable to be deducted from the

(iii) Salary received by a non-citizen non-resident for services rendered

Any remuneration received by employees of foreign Government from

(a) the Government; or

(b) any company wholly owned by the Central or any State

(c) any company which is subsidiary of a company referred to in (b)

(d) any statutory corporation; or

© The Institute of Chartered Accountants of India

1.2 BASIS OF CHARGE [SECTION 15]

1.2.1 Advance Salary

© The Institute of Chartered Accountants of India

1.2.2 Arrears of salary

1.3 SALARY, PERQUISITE AND PROFITS IN LIEU

Perquisite Profits in lieu of salary

1.3.1 Meaning of Salary

© The Institute of Chartered Accountants of India

‘Salary’ under section 17(1), includes the following:

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

than blind/ deaf and Fully Exempt under

(A) Allowances which are fully taxable under both regime

© The Institute of Chartered Accountants of India

Metro Cities (i.e., Delhi, Kolkata, Other Cities

• Exemption u/s 10(13A) would be available to an assessee only

© The Institute of Chartered Accountants of India