I.

Income under the head Salaries

• Salary is defined to include:

– a) Wages
– b) Annuity
– c) Pension
– d) Gratuity
– e) Fees, Commission, Perquisites, Profits in lieu of or in addition
to Salary or Wages
– f) Advance of Salary
– g) Leave Encashment
– h) Annual accretion to the balance of Recognized Provident Fund
– i) Transferred balance in Recognized Provident Fund
– j) Contribution by Central Government or any other employer to
Employees Pension Account as referred in Sec. 80CCD
Some Important Concept of salaries
 Basis of Charge (Section 15)
a) Salary income is chargeable to tax on “due basis” or “receipt basis”
whichever is earlier.

b) Existence of relationship of employer and employee is must between the

payer and payee to tax the income under this head.

c) Income from salary taxable during the year shall consists of following:
– i. Salary due from employer (including former employer) to taxpayer during the
previous year, whether paid or not;
– ii. Salary paid by employer (including former employer) to taxpayer during the
previous year before it became due;
– iii. Arrear of salary paid by the employer (including former employer) to taxpayer
during the previous year, if not charged to tax in any earlier year;

• Exceptions - Remuneration, bonus or commission received by a partner from

the firm is not taxable under the head Salaries rather it would be taxable
under the head business or profession.
 Place of accrual of salary:
a) Salary accrues where the services are rendered even if
it is paid outside India;
b) Salary paid by the Foreign Government to his employee
serving in India is taxable under the head Salaries;
c) Leave salary paid abroad in respect of leave earned in
India shall be deemed to accrue or arise in India.
Exceptions - If a Citizen of India render services outside
India, and receives salary from Government of India, it
would be taxable as salary deemed to have accrued in
India.
 Fully taxable allowances
• Servant Allowance
• Fixed Medical Allowance
• Meal Allowance
• Dearness Allowance
• Holiday Allowance
• Entertainment Allowance
• Telephone Allowance
• Overtime Allowance
• Overseas Allowance
• Non Practicing Allowance
• Rural Allowances
• City Compensatory Allowance
• Project Allowance (Personal research)
• High Cost of Living Allowance
• Marriage/ Family Allowance
 Fully exempted allowances
• Allowances paid to supreme Court and High
Court Judges.
• Any salary or allowances or perquisites paid to
the employees of United Nation Organization.
• Section 10(7), any allowances or perquisites
paid or allowed by Government of Indian
Citizen ,Citizen for rendering services outside
India.
Section 10 (14) Special Allowances
• Note: Least of following is exempt (official
allowance)
a) Amt. of allowance received.
b) Amt. Spent for official purpose.
 Official Allowances
• Transfer Allowance
• Helper Allowance
• Daily Allowance
• Conveyance Allowance
• Academic Allowance
• Uniform Allowance
• Research and Development Allowance
• Travelling Allowance
 Personal Allowances

• Note: Amt. received and limit specified in

rules, whichever is lower is exempted.
Taxability of various components of salary:
No. Section Particulars Taxability/Exemption

1. 17 Basic salary Fully taxable

2. 17 Dearness Allowance (referred to Fully taxable

as ‘DA’)

3. 17 Bonus, fees or commission Fully taxable

 Allowances
4. 10(13A) House Least of the following is exempt:
read rent a) Actual HRA Received
with allowance b) 40% of Salary (50%, if house situated in Mumbai,
Rule 2A Calcutta, Delhi or Chennai)
c) Rent paid minus 10% of salary
* Salary = Basic + DA (if part of retirement benefit) +
Turnover based Commission
Note:
i. Fully taxable, if HRA is received by an employee who is
living in his own house or if he does not pay any rent
ii. It is mandatory for employee to report PAN of the
landlord to the employer if rent paid is more than Rs.
1,00,000 [Circular No. 08 /2013 dated 10-10-2013].
5. 10(14) Children education allowance Up to Rs. 100 per month per child up
to a maximum of 2 children is
exempt
6. 10(14) Hostel expenditure allowance Up to Rs. 300 per month per child up
to a maximum of 2 children is
exempt
7. 10(14) Transport Allowance granted Rs. 3,200 per month granted to an
to an employee to meet employee, who is blind or deaf and
expenditure for the purpose of dumb or orthopedically
commuting between place of handicapped with disability of lower
residence and place of duty extremities
8. Sec. Outstation Allowance: Amount of exemption shall be lower
10(14) Allowance granted to an of following:
employee working in any a) 70% of such allowance; or
transport business to meet his b) Rs. 10,000 per month.
personal expenditure during
his duty performed in the
course of running of such
transport from one place to
another place provided
employee is not in receipt of
daily allowance.
14. 10(14) Uniform allowance Exempt to the extent of expenditure
incurred for official purposes
15. 10(7) Any allowance or perquisite paid or Fully Exempt
allowed by Government to its
employees (an Indian citizen)
posted outside India
16. - Allowances to Judges of High Fully Exempt.
Court/Supreme Court (Subject to
certain conditions)
12. 10(14) Helper/Assistant allowance Exempt to the extent of expenditure
incurred for official purposes
13. 10(14) Research allowance granted for Exempt to the extent of expenditure
encouraging the academic research incurred for official purposes
and other professional pursuits
17. 10(45) Following allowances and Fully Exempt
perquisites given to serving
Chairman/Member of UPSC is
exempt from tax:
a) Value of rent free official
residence
b) Value of conveyance facilities
including transport allowance
c) Sumptuary allowance
d) Leave travel concession
18. - Allowances paid by the UNO Fully Exempt
to its employees
19. Sec. 10(14) read Special compensatory Amount exempt from tax
with Rule 2BB Allowance (Hilly Areas) varies from Rs. 300 to Rs.
(Subject to certain conditions 7,000 per month.
and locations)
20. Sec. 10(14) read Border area, Remote Locality Amount exempt from tax
with Rule 2BB or Disturbed Area or Difficult varies from Rs. 200 to Rs.
Area Allowance (Subject to 1,300 per month.
certain conditions and
locations)
21. Sec. 10(14) read Tribal area allowance in (a) Up to Rs. 200 per month is
with Rule 2BB Madhya Pradesh (b) Tamil exempt
Nadu (c) Uttar Pradesh (d)
Karnataka (e) Tripura (f)
Assam (g) West Bengal (h)
Bihar (i) Orissa
25. Sec. 10(14) read Underground Allowance to Up to Rs. 800 per month is
with Rule 2BB employees working in exempt
uncongenial, unnatural
climate in underground mines
29. 10(14) City Compensatory Allowance Fully Taxable

30. 10(14) Fixed Medical Allowance Fully Taxable

31. 10(14) Tiffin, Lunch, Dinner or Fully Taxable

Refreshment Allowance

32. 10(14) Servant Allowance Fully Taxable

33. 10(14) Project Allowance Fully Taxable

34. 10(14) Overtime Allowance Fully Taxable

35. 10(14) Telephone Allowance Fully Taxable

36. 10(14) Holiday Allowance Fully Taxable

37. 10(14) Any Other Cash Allowance Fully Taxable

 Perquisites
17(2)(i)/(ii) License fees determined in accordance with rules
Rent free unfurnished accommodation
framed by Government for allotment of houses
40. read with provided to Central and State
shall be deemed to be the taxable value of
Rule 3(1) Government employees
perquisites.
42. 17(2)(i)/(ii) Rent free furnished accommodation Taxable value of perquisites shall be computed in
read with following manner:
Rule 3(1) a) Taxable value of perquisite assuming
accommodation to be provided to the employee
is unfurnished
b) Add: 10% of original cost of furniture and
fixtures (if these are owned by the employer) or
actual higher charges paid or payable (if these
are taken on rent by the employer).
c) Less: The value so determined shall be reduced
by the amount of rent, if any, recovered from the
employee

43. 17(2)(i)/(ii) Accommodation provided in a hotel Taxable value of perquisite shall be lower of
read with Hotel accommodation will not be following:
Rule 3(1) chargeable to tax if : a) Actual charges paid or payable by the
a) It is provided for a total period not employer to such hotel; or
exceeding in aggregate 15 days in the b) 24% of salary
financial year; and
b) Such accommodation in hotel is
provided on employee’s transfer from
one place to another place.
17(2)(i)/(ii) read with Rule 3(1): Unfurnished rent free accommodation provided to
other employees
• Taxable value of perquisites
• i. If house property is owned by the employer, the taxable value of perquisite
shall be:
– A. 15% of salary, if population of city where accommodation is provided
exceeds 25 lakhs
– B. 10% of salary, if population of city where accommodation is provided
exceeds 10 lakhs but does not exceed 25 lakhs
– C. 7.5% of salary, if accommodation is provided in any other city
• ii. If house property is taken on lease or rent by the employer, the taxable value
of perquisite shall be:
– i. Lease rent paid or payable by the employer or 15% of the salary, whichever
is lower
*Salary includes: a) Basic Pay, b) Dearness Allowance (only to the extent it
forms part of retirement benefit salary), c) Bonus, d) Commission, e) All
other allowances (only taxable portion), f) Any monetary payment which
is chargeable to tax
But does not include
– i. Value of any perquisite
– ii. Employer’s contribution to PF
– iii. Benefits received at the time of retirement like gratuity, pension etc.

Note:
1) Rent free accommodation is not chargeable to tax if provided in remote area.

2) Rent free accommodation provided to High Court or Supreme Court Judges, Union
Ministers, Leader of Opposition in Parliament, an official in Parliament and Serving
Chairman and members of UPSC is tax free perquisite.

3) The value so determined shall be reduced by the amount of rent, if any, recovered
from the employee.

4) If employee is transferred and retain property at both the places, the taxable value of
perquisites for initial period of 90 days shall be determined with reference to only
one accommodation (at the option of the assessee). The other one will be tax free.
However after 90 days, taxable value of perquisites shall be charged with reference
to both the accommodations.
 Interest free or concessional Loans Rule
3(7) (i)
Perquisite= Sum of Monthly Outstanding
balance* (SBI Rate-ER Rate)*1/2
Exception : No Perquisite shall be computed in
following cases:
a) Where aggregate amount of all such loan
during a particular year is upto Rs. 20,000.
b) If employer has given loan for treatment of
specified disease given under rule 3A, there is
no perquisite value.
Free food or refreshment Rule 3(7) (iii)
• Free refreshment=Exempt
• Free meals
• Prequisite=(Cost of Meal-Amount Recovered)
However excess over Rs. 50 shall be taxable.
 Facility of travelling,touring,accommodation
(Holiday home) Rule 3(7) (ii)
• Perquisite value shall be actual expenditure
incurres by the employer, reduced by the amount
recovered from the employee.
• If the employee is on official tour and any member
of his household has accompanied him, perquisite
value is amount spent on Family Member.
• Of official tour was extended for personal purpose,
expenditure for the extended part of the tour shall
be taxable
 Gift to the employees Rule 3(7) (iv)
• Cash Gift =Fully taxable
• Kind Gift= Exempt Upto Rs.5000 p.a.
Credit card Facility Rule 3(7)(V)
Perquisite Value =Amount spent for personal use of employee.
Club facilities Rule 3(7) (VI)
Perquisite Value = Amount spent for personal use of employee
Any other benefits Rule 3(7) (IX)
Perquisite=Cost to the employer-Amount Recovered
Note: If the employer has provided telephone facility including
the mobile phone, it will be exempt.
Use of employer’s assets by the employees
Rule 3(7)(vii)
• Laptop/Computer-NIL
• Other- 10% p.a. of actual cost of such asset (or
hire charges paid by ER)
Less: amount recovered from EE.
44. 17(2)(viii) Motor Car / Other Taxable value of perquisites
read with Rule Conveyance
3(2)

S. No. Circumstances Engine Capacity upto 1600 cc Engine Capacity above 1600 cc (value of
(value of perquisite ) perquisite)

1 Motor Car is owned or hired by the employer

1.1 Where maintenances and running expenses including remuneration of the chauffeur are met or
reimbursed by the employer.

1.1-A If car is used Fully exempt subject to Fully exempt subject to maintenance of
wholly and maintenance of specified specified documents
exclusively in the documents
performance of
official duties.

1.1-B If car is used Actual amount of expenditure incurred by the employer on the
exclusively for the running and maintenance of motor car including remuneration paid by
personal purposes the employer to the chauffeur and increased by the amount
of the employee representing normal wear and tear of the motor car at 10% p.a. of the
or any member of cost of vehicle less any amount charged from the employee for such
his household. use is taxable
1.2 Where maintenances and running expenses are met by the employee.

1.2-A If car is used wholly and Not a perquisite, hence, Not a perquisite,
exclusively in the not taxable hence, not taxable
performance of official duties.

1.2-B If car is used exclusively for Expenditure incurred by the employer (i.e. hire
the personal purposes of the charges, if car is on rent or normal wear and tear
employee or any member of at 10% of actual cost of the car) plus salary of
his household chauffeur if paid or payable by the
employer minus amount recovered from the
employee.

1.2-C The motor car is used partly in Rs. 600 per month Rs. 900 per month
the performance of duties and (plus Rs. 900 per month, if (plus Rs. 900 per
partly for personal purposes of chauffeur is also provided month, if chauffeur
the employee or any member to run the motor car) is also provided to
of his household run the motor car)
2 Motor Car is owned by the employee

2.1 Where maintenances and running expenses including remuneration of the chauffeur are
met or reimbursed by the employer.

2.1-A The reimbursement is for the Fully exempt subject to Fully exempt subject to
use of the vehicle wholly and maintenance of specified maintenance of specified
exclusively for official documents documents
purposes

2.1-B The reimbursement is for the Actual expenditure incurred by the

use of the vehicle exclusively employer minus amount recovered from the employee
for the personal purposes of
the employee or any member
of his household

2.1-C The reimbursement is for the Actual expenditure Actual expenditure incurred
use of the vehicle partly for incurred by the by the employer minus Rs.
official purposes and partly for employer minus Rs. 1800 2400 per month and Rs. 900
personal purposes of the per month and Rs. 900 per per month if chauffer is also
employee or any member of month if chauffer is also provided minus amount
his household. provided minus amount recovered from employee.
recovered from employee.
3 Where the employee owns any other automotive conveyance and
actual running and maintenance charges are met or reimbursed by
the employer

3.1 Reimbursement for the Fully exempt subject to Fully exempt subject
use of the vehicle wholly maintenance of to maintenance of
and exclusively for specified documents specified documents
official purposes;

3.2 Reimbursement for the Actual expenditure Not Applicable

use of vehicle partly for incurred by the
official purposes and employer minus Rs.
partly for personal 900 per month minus
purposes of the amount recovered from
employee. employee
47. 17(2)(viii) Education Taxable value of
read with Rule Facilities perquisites (See Note 2
3(5) below)
Facility extended to Value of perquisite
Provided in the school owned Provided in any other
by the employer school
Children Cost of such education in similar Amount
school less Rs. 1,000 per month incurred less amount
per child (irrespective of numbersrecovered from employee
of children) less amount
(an exemption of Rs.
recovered from employee 1,000 per month per child
is allowed)
Other family member Cost of such education in similar Cost of such education
school less amount recovered incurred
from employee

2.1 Other Educational Facilities

Particulars Taxable Value of
Perquisites
Reimbursement of school fees of children or family member Fully taxable
of employees
Free educational facilities/ training of employees Fully exempt
62. Proviso Medical a) Expense incurred or reimbursed by the employer for the medical
to facilities in treatment of the employee or his family (spouse and children,
section India dependent - parents, brothers and sisters) in any of the following
17(2)
hospital is not chargeable to tax in the hands of the employee:
i. Hospital maintained by the employer.
ii. Hospital maintained by the Government or Local Authority or any
other hospital approved by Central Government
iii. Hospital approved by the Chief Commissioner having regard to
the prescribed guidelines for treatment of the prescribed diseases.
b) Medical insurance premium paid or reimbursed by the employer is
not chargeable to tax.
However, the medical facility is taxable only in case of Specified
Employees:
1) A director-employee
2) An employee who has substantial interest (i.e. beneficial
owner of equity shares carrying 20% or more voting power) in
the employer-company
3) An employee whose monetary income* under the salary
exceeds Rs. 50,000
63. Proviso to Medical facilities Any expenditure incurred or reimbursed by the
section 17(2) outside India employer for medical treatment of the employee or his
family member outside India is exempt to the extent of
following (subject to certain condition):
a. Expenses on medical treatment - exempt to the
extent permitted by RBI.
b. Expenses on stay abroad for patient and one
attendant - exempt to the extent permitted by RBI.
c. Expenditure incurred on travelling of patient and
one attendant- exempt, if Gross Total Income (before
including the travel expenditure) of the employee, does
not exceed Rs. 2,00,000.
 Deduction from salary

1. 16(ia) Standard Deduction Rs. 50,000 or the amount of salary, whichever is lower

2. 16 (ii) Entertainment Least of the following is deductible :

Allowance received by a) Rs 5,000
the Government b) 1/5th of salary (excluding any allowance, benefits or
employees (Fully other perquisite)
taxable in case of
other employees) c) Actual entertainment allowance received

3. 16(iii) Employment Amount actually paid during the year is deductible.

Tax/Professional Tax. However, if professional tax is paid by the employer on
behalf of its employee than it is first included in the salary
of the employee as a perquisite and then same amount is
allowed as deduction.
 Retirement Benefits
Leave Encashment

Leave Encashment during employment is fully taxable.

1. 10(10AA) Encashment of unutilized Fully Exempt

earned leave at the time of
retirement of Government
employees
2. 10(10AA) Encashment of unutilized Least of the following shall be exempt from tax:
earned leave at the time of a) Amount actually received
retirement of other employees
b) Unutilized earned leave* X Average monthly salary
(not being a Government
employee) c) 10 months Average Salary**
d) Rs. 3,00,000
* While computing unutilized earned leave, earned
leave entitlements cannot exceed 30 days for each
completed year of service rendered to the current
employer
** Average salary = Average Salary*** of last 10
months immediately preceding the retirement
***Salary = Basic Pay + DA (to the extent it forms part
of retirement benefits)+ turnover based commission
 Gratuity

1. During Gratuity Received Fully Taxable

Employment
2. After For Govt. Fully Exempt
retirement Employee
3. After For Non Govt. Least of the following is exempt:
retirement Employee(covered a)Rs.20Lakh (For Complete life---reduced if taken before)
under Payment of b) Gratuity Received
Gratuity Act) c) 15/26* last Drawn Salary*CY
Note:
1. CY= Completed Year or part thereof in excess of 6 M
2. Last drawn Salary=Basic+ DA
4. After For Non Govt. Least of the following is exempt:
retirement Employee( not a)Rs.20Lakh
covered under b) Gratuity Received
Payment of c) 1/2* Average Salary*CY
Gratuity Act)
Note:
1. CY= Completed Year
2. Last drawn Salary=Basic+ DA (RS)+ Comm. (%)
3. Avg. Salary= 10M Avg. Salary Immediately Proceeding
 Pension

1. Uncommuted For Both Fully Taxable

Pension
2. Commuted For Govt. Fully Exempt
Pension Employee
(lump some)
3. Commuted For Non Govt. Gratuity Received
Pension Employee 1/3 of total pension is exempt
(lump some) Gratuity not received
½ of total pension is exempt
Note : (Commuted Pension/ Commuted %)
VRS
 Provident Fund
Provide ER EE Interest Credited Lump sum Withdrawal
nt Fund Contributio Contri
n bution

SPF EXEMPT Deduction Exempt Exempt

u/s 80C

RPF Exempt upto 12% Deduction Exempt Upto 9.5% P.a. Exempt, If following conditions satisfied:
of Retirement u/s 80C (note: Interest earned on 1. 5 Years of contribution service with same
Benefit Salary more than 2.5lac employer
contribution is taxable and if 2. Retires before rendering 5 years of because of
employer is not contributing reason beyond the control of employee.
in this then the limit 3. Transfer to old to new RPF account employer
increases by 5 lakh)

ER Cont. EE Cont. Int. on EE Int. on ER

Cont. cont.
URPF Not Taxable No Not Taxable
deduction Taxable Exempted Taxable Taxable u/h
u/h Salary u/h other salary
source

PPF Not Applicable Deduction Exempt Exempt

u/s 80C
 Amendments made in 2020
Section 17:(2)(VIII)
Annual accretion by way of interest, dividend or
any other amount of similar nature to the credit
of the RPF/NPS/Approved super Annulation
Fund which relates to the employer’s
contribution and included in Total Income, If
exceeds 7.5 lakhs will be treated as perks.
Section 17(2) (VIIIa): Interest received in above
case will also be treated as taxable.