Damodaram Sanjivayya National Law University

Vishakhapatnam, AP

Project title:

Income from salary

Name of the faculty:

Ms. Sree Sudha

Name of the subject:

Tax law

Name of the student: R. Jashwanth

Roll number: 2017113

Semester: 6

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 Table of contents

Acknowledgement.......................................................................................................................3
Abstract.......................................................................................................................................4
Introduction.................................................................................................................................5

Computation of " Salary " Income [Section 15-17]............................................................8

WHAT IS “SALARY”.......................................................................................................................8
WHAT DOES “SALARY” INCLUDE..................................................................................................8
DEDUCTION FROM SALARY INCOME............................................................................................9
PERQUISITES................................................................................................................................9
VALUATION OF PERQUISITES......................................................................................................10
PERQUISITES EXEMPT FROM INCOME TAX.................................................................................13
What is CTC?..............................................................................................................................15
Fully Taxable allowances:.........................................................................................................15
Partly Taxable allowances:.......................................................................................................16
Non-Taxable allowances:..........................................................................................................16
Perquisites.................................................................................................................................17
Perquisites that are taxable for all the employees:...................................................................17
Perquisites that are taxable only to specified employees:.........................................................17
Perquisites that are exempt from tax:......................................................................................17
Points to consider:.....................................................................................................................17
Perquisites.................................................................................................................................18
 Perquisites may be fully taxable, partially taxable or fully exempt.................................19
Fully and Partially Taxable Perquisites...................................................................................19
1. Rent free accommodation:....................................................................................................19
2. Concession in rent:................................................................................................................19
3. Payment by the employer in respect of an obligation of employee:.....................................19
16. Transfer of movable assets..................................................................................................23
Exemptions................................................................................................................................24
Gratuity.....................................................................................................................................24
Taxability of Gratuity...............................................................................................................24

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 Pension......................................................................................................................................24
1. Uncommuted Pension:..........................................................................................................24
2. Commuted Pension:..............................................................................................................24
Taxation of Pension...................................................................................................................25
Leave Encashment....................................................................................................................25
Taxability of Leave Encashment..............................................................................................25
Retrenchment Compensation...................................................................................................25
Taxability of Retrenchment Compensation..............................................................................25
Voluntary Retirement Receipts................................................................................................25
Taxability of Voluntary Retirement Receipts...........................................................................25
Income-tax paid by employer...................................................................................................26
Provident Fund.........................................................................................................................26
1. Public Provident Fund (PPF):...............................................................................................26
2. Statutory Provident Fund:....................................................................................................26
3. Recognised Provident Fund:.................................................................................................26
4. Unrecognised Provident Fund:.............................................................................................26
Taxability of Provident Fund....................................................................................................27
1. Public Provident Fund:.........................................................................................................27
2. Statutory Provident Fund:....................................................................................................27
3. Recognised Provident Fund:.................................................................................................27
Conclusion..................................................................................................................................28

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 Acknowledgement

I am thankful to my professor Ms. Sree Sudha ma’am, Damodaram Sanjivayya national law
university, Vishakhapatnam, for her valuable guidance, encouragement and cooperation
during the course of this research project.

The completion of this project could not have been possible without the participation and
assistance of so many people. Their contributions are appreciated and gratefully
acknowledged!

To all the relatives, friends and others, who in one way or the other shared their support,
either morally, financially, and physically, thank you.

I thank you!

.. .. .. .. .. … . . . . . . . . . . . . . . . . . . . . . . . . .

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 Abstract

Income from salary is the income or remuneration received by an individual for services he is
rendering or a contract undertaken by him. This clause essentially assimilates the
remuneration received by a person for the services provided by him under the contract of
employment.

This amount of remuneration will be considered as income for the purposes of Income Tax
Act only if there is an Employer and employee relationship between the person who is
making the payment and the person who is receiving the payment.

Employer and Employee Relationship – Any payment that is received by a person will be
treated as Income under Income Tax Act if there exist an Employer and employee
relationship between the payer and payee. For the purpose of qualifying income as income
from salary, their relationship should be that of a master and servant. Where a master is a
person who directs his employee that what is to be done and how it is to be done and servant
is the person who is liable to conduct that work in the manner told by his employer.

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 Introduction

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

Points to consider:

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:

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 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.

It is not necessary that a recurring and regular receipt alone is a perquisite. Even a casual and
non-recurring receipt can be perquisite if the aforesaid conditions are satisfied. The following
propositions should also be kept in view.
Perquisites are included in salary income only if they are received by an employee from his
employer (maybe former, present or prospective). Perquisites, received from a person other
than employer, are taxable under the head “Profits and gains of business or profession” or
“Income from other sources”.
A benefit or advantage would be taxable as perquisites only if it has a legal origin. As
unauthorized advantage taken by an employee without his employer’s authority would create
a legal obligation to restore such advantage, it would not amount to “perquisite” taxable
under the Act. On the other hand, if the benefit has been conferred unilaterally without the aid
of agreement between the parties, the employee can be taxed on the perquisites. It is not
necessary that the benefit should have been received under an enforceable right.

Valuation of Perquisite in respect of Interest-Free Loan or Loan at Concessional

Rate of Interest [Section 3(7)(i)]
If a loan is given by an employer to the employee (or any member of his household), it is
a perquisite chargeable to tax. It is taxable on the following basis—
Step 1: Find out the “maximum outstanding monthly balance” (i.e., the aggregate
outstanding balance for each loan as on the last day of each month).
Step 2: Find out rate of interest charged by the State Bank of India (SBI) as on the first
day of the relevant previous year in respect of loan for the same purpose advanced by it.
Step 3: Calculate interest for each month of the previous year on the outstanding amount
mentioned in Step 1 at the rate of interest given in Step 2.

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Step 4 : From the total interest calculated for the entire previous year under Step 3,
deduct interest actually recovered, if any, from the employee during the previous year.
Step 5 : The balance amount [i.e. Step 3 minus Step 4] is taxable value of the perquisite

Computation of " Salary " Income [Section 15-17]

Salary income of an employee is to be computed in accordance with the provisions laid down
in sections 15, 16 and 17. Section 15, as discussed earlier gives the scope of this head and
tells us that which incomes shall form part of this head. Section 16 gives deductions to be
allowed out of incomes taxable under this head. Section 17(1) defines the word ‘salary’ as
mentioned in section 15. Section 17(2) and 17(3) further define the terms ‘Perquisites’ and
“profits in lieu of salary”. 

 WHAT IS “SALARY”
Salary is the remuneration received by or accruing to an individual, periodically, for service
rendered as a result of an express or implied contract. The actual receipt of salary in the
previous year is not material as far as its taxability is concerned. The existence of employer-
employee relationship is the sine-qua-non for taxing a particular receipt under the head
‘salaries.’ For instance, the salary received by a partner from his partnership firm carrying on
a business is not chargeable as “Salaries” but as “Profits & Gains from Business or
Profession”. Similarly, salary received by a person as MP or MLA is taxable as “ Income
from other sources”, but if a person received salary as Minister of State/ Central Government,
the same shall be charged to tax under the head “Salaries”. Pension received by an assessee

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from his former employer is taxable as “Salaries” whereas pension received on his death by
members of his family (Family Pension) is taxed as “Income from other sources”.

WHAT DOES “SALARY” INCLUDE

Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of
“Salaries” including therein (i) Wages (ii) Annuity or pension (iii) Gratuity (iv) Fees,
Commission, perquisites or profits in lieu of salary (v) Advance of Salary (vi) Amount
transferred from unrecognized provident fund to recognized provident fund (vii) Contribution
of employer to a Recognised Provident Fund in excess of the prescribed limit (viii) Leave
Encashment (ix) Compensation as a result of variation in Service contract etc. (x)
Contribution made by the Central Government to the account of an employee under a notified
pension scheme.

DEDUCTION FROM SALARY INCOME

The following deductions from salary income are admissible as per Section 16 of the Income-
tax Act.

(i)            Professional/Employment tax levied by the State Govt.

(ii)           Entertainment Allowance- Deduction in respect of this is available to a government

employee to the extent of Rs. 5000/- or 20% of his salary or actual amount received,
whichever is less.

It is to be noted that no standard deduction is available from salary income w.e.f. 01.04.2006
i.e. A.Y.2006-07 onwards.

PERQUISITES
“Perquisite” may be defined as any casual emolument or benefit attached to an office or
position in addition to salary or wages.

“Perquisite” is defined in the section 17(2) of the Income tax Act as including:

(i)            Value of rent-free/concessional rent accommodation provided by the employer.

ii)           Any sum paid by employer in respect of an obligation which was actually payable
by the assessee.

(iii)          Value of any benefit/amenity granted free or at concessional rate to specified

employees etc.

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(iv)         The value of any specified security or sweat equity shares allotted or transferred,
directly or indirectly, by the employer, or former employer, free of cost or at concessional
rate to the assessee.

(v)          The amount of any contribution to an approved superannuation fund by the

employer in respect of the assessee, to the extent it exceeds one lakh rupees; and

(vi)         the value of any other fringe benefit or amenity as may be prescribed.

VALUATION OF PERQUISITES
As a general rule, the taxable value of perquisites in the hands of the employees is its cost to
the employer. However, specific rules for valuation of certain perquisites have been laid
down in Rule 3 of the I.T. Rules. These are briefly given below.

    Valuation of residential accommodation provided by the employer:-

(a)          Union or State Government Employees- The value of perquisite is the license fee as
determined by the Govt. as reduced by the rent actually paid by the employee.

(b)          Non-Govt. Employees- The value of perquisite is an amount equal to 15% of the
salary in cities having population more than 25 lakh, (10% of salary in cities where
population as per 2001 census is exceeding 10 lakh but not exceeding 25 lakh and 7.5% of
salary in areas where population as per 2001 census is 10 lakh or below). In case the
accommodation provided is not owned by the employer, but is taken on lease or rent, then the
value of the perquisite would be the actual amount of lease rent paid/payable by the employer
or 15% of salary, whichever is lower. In both of above cases, the value of the perquisite
would be reduced by the rent, if any, actually paid by the employee.

Value of Furnished Accommodation- The value would be the value of unfurnished

accommodation as computed above, increased by 10% per annum of the cost of furniture
(including TV/radio/ refrigerator/AC/other gadgets). In case such furniture is hired from a
third* party, the value of unfurnished accommodation would be increased by the hire charges
paid/payable by the employer. However, any payment recovered from the employee towards
the above would be reduced from this amount.

Value of hotel accommodation provided by the employer- The value of perquisite arising

out of the above would be 24% of salary or the actual charges paid or payable to the hotel,
whichever is lower. The above would be reduced by any rent actually paid or payable by the

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employee. It may be noted that no perquisite would arise, if the employee is provided such
accommodation on transfer from one place to another for a period of 15 days or less.

Perquisite of motor car provided by the employer– W.e.f. 1-4-2008, if an employer

providing such facility to his employee is not liable to pay fringe benefit tax, the value of
such perquisite shall be :

a)            Nil, if the motor car is used by the employee wholly and exclusively in the
performance of his official duties.

b)            Actual expenditure incurred by the employer on the running and maintenance of
motor car, including remuneration to chauffeur as increased by the amount representing
normal wear and tear of the motor car and as reduced by any amount charged from the
employee for such use (in case the motor car is exclusively for private or personal purposes
of the employee or any member of his household).

c)            Rs. 1800- (plus Rs. 900-, if chauffeur is also provided) per month (in case the motor
car is used partly in performance of duties and partly for private or personal purposes of the
employee or any member of his household if the expenses on maintenance and running of
motor car are met or reimbursed by the employer). However, the value of perquisite will be
Rs. 2400- (plus Rs. 900-, if chauffeur is also provided) per month if the cubic capacity if
engine of the motor car exceeds 1.6 litres.

d)            Rs. 600- (plus Rs. 900-, if chauffeur is also provided) per month (in case the motor
car is used partly in performance of duties and partly for private or personal purposes of the
employee or any member of his household if the expenses on maintenance and running of
motor car for such private or personal use are fully met by the employee). However, the value
of perquisite will be Rs. 900- (plus Rs. 900-, if chauffeur is also provided) per month if the
cubic capacity of engine of the motor car exceeds 1.6 litres.

If the motor car or any other automotive conveyance is owned by the employee but the actual
running and maintenance charges are met or reimbursed by the employer, the method of
valuation of perquisite value is different.

 Perquisite arising out of supply of gas, electric energy or water: This shall be determined
as the amount paid by the employer to the agency supplying the same. If the supply is from
the employer’s own resources, the value of the perquisite would be the manufacturing cost

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per unit incurred by the employer. However, any payment received from the employee
towards the above would be reduced from the amount

 Free/Concessional Educational Facility: Value of the perquisite would be the

expenditure incurred by the employer. If the education institution is maintained & owned
by the employer, the value would be nil if the value of the benefit per child is below Rs.
1000/- P.M. or else the reasonable cost of such education in a similar institution in or near the
locality.

Free/Concessional journeys provided by an undertaking engaged in carriage of

passengers or goods: Value of perquisite would be the value at which such amenity is
offered to general public as reduced by any amount, if recovered from the employee.
However, these provisions are not applicable to the employees of an airline or the railways.

Provision for sweeper, gardener, watchman or personal attendant: The value of benefit

resulting from provision of any of these shall be the actual cost borne by the employer in this
respect as reduced by any amount paid by the employee for such services. (Cost to the
employer in respect to the above will be salary paid/payable).

Value of certain other fringe benefits:

(a)          Interest free/concessional loans– The value of the perquisite shall be the excess of
interest payable at the prescribed interest rate over, interest, if any, actually paid by the
employee or any member of his household. The prescribed interest rate would be the rate
charged by State Bank of India as on the 1st Day of the relevant Previous Year in respect of
loans of the same type and for same purpose advanced by it to general public. Perquisite to be
calculated on the basis of the maximum outstanding monthly balance method. However,
loans upto Rs. 20,000/-, loans for medical treatment specified in Rule 3A are exempt
provided the same are not reimbursed under medical insurance.

b)          Value of free meals- The perquisite value in respect of free food and non-alcoholic
beverages provided by the employer, not liable to pay fringe benefit tax, to an employee shall
be the expenditure incurred by the employer as reduced by the amount paid or recovered
from the employee for such benefit or amenity. However, no perquisite value will be taken if
food and non-alcoholic beverages are provided during working hours and certain conditions
specified under Rule 3(7)(iii) are satisfied.

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(c)  Value of gift or voucher or token– The perquisite value in respect of any gift, or
voucher, or taken in lieu of which such gift may be received by the employee or member of
his household from the employer, not liable to pay fringe benefit tax, shall be the sum equal
to the amount of such gift, voucher or token. However, no perquisite value will be taken if the
value of such gift, voucher or taken is below Rs. 5000- in the aggregate during the previous
years.

(d)          Credit card provided by the employer– The perquisite value in respect of

expenses incurred by the employee or any of his household members, which are charged to a
credit card provided by the employer, not liable to pay fringe benefit tax, which are paid or
reimbursed by such employer to an employee shall be taken to be such amount paid or
reimbursed by the employer. However, no perquisite value will be taken if the expenses are
incurred wholly and exclusively for official purposes and certain conditions mentioned in
Rule 3(7)(v) are satisfied.

(e)          Club membership provided by the employer– The perquisite value in respect of

amount paid or reimbursed to an employee by an employer, not liable to pay fringe benefit
tax, against the expenses incurred in a club by such employee or any of his household
members shall be taken to be such amount incurred or reimbursed by the employer as
reduced by any amount paid or recovered from the employee on such account. However, no
perquisite value will be taken if the expenditure is incurred wholly any exclusively for
business purposes and certain conditions mentioned in Rule 3(7)(vi) are satisfied.

The value of any other benefit or amenity 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.

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
as follows:-

(a)          In a case where, on the date of 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 the date on the said stock exchange.

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(b)          In a case where, on the date of exercising of the option, the share in the company is
not listed on a recognized 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.

(c) 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.

 PERQUISITES EXEMPT FROM INCOME TAX

Some instances of perquisites exempt from tax are given below:

Provision of medical facilities (Proviso to Sec. 17(2)): Value of medical treatment in any
hospital maintained by the Government or any local authority or approved by the Chief
Commissioner of Income-tax. Besides, any sum paid by the employer towards medical
reimbursement other than as discussed above is exempt upto Rs. 15,000/-.

Perquisites allowed outside India by the Government to a citizen of India for rendering
services outside India (Sec. 10(7)).

Rent free official residence provided to a Judge of High Court or Supreme Court or an
Official of Parliament, Union Minister or Leader of Opposition in Parliament.

No perquisite shall arise if interest free/concessional loans are made available for medical
treatment of specified diseases in Rule 3A or where the loan is petty not exceeding in the
aggregate Rs.20,000/-

No perquisite shall arise in relation to expenses on telephones including a mobile phone

incurred on behalf of the employee by the employer.

 ALLOWANCES

Allowance is defined as a fixed quantity of money or other substance given regularly in

addition to salary for meeting specific requirements of the employees. As a general rule, all
allowances are to be included in the total income unless specifically exempted. Exemption in
respect of following allowances is allowable to the extent mentioned against each :-

 House Rent Allowance:- Provided that expenditure on rent is actually incurred, exemption

available shall be the least of the following :

(i)            HRA received.

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(ii)           Rent paid less 10% of salary.

(iii) 40% of Salary (50% in case of Mumbai, Chennai, Kolkata, Delhi) Salary here means
Basic + Dearness Allowance, if dearness allowance is provided by the terms of employment.

 Leave Travel Allowance: The amount actually incurred on performance of travel on leave

to any place in India by the shortest route to that place is exempt. This is subject to a
maximum of the air economy fare or AC 1st Class fare (if journey is performed by mode
other than air) by such route, provided that the exemption shall be available only in respect of
two journeys performed in a block of 4 calendar years.

Certain allowances given by the employer to the employee are exempt u/s 10(14). All these
exempt allowance are detailed in Rule 2BB of Income-tax Rules and are briefly given below:

For the purpose of Section 10(14)(i), following allowances are exempt, subject to actual
expenses incurred:

(i)            Allowance granted to meet cost of travel on tour or on transfer.

(ii)           Allowance granted on tour or journey in connection with transfer to meet the daily
charges incurred by the employee.

(iii)          Allowance granted to meet conveyance expenses incurred in performance of duty,

provided no free conveyance is provided.

(iv)         Allowance granted to meet expenses incurred on a helper engaged for performance
of official duty.

(v)          Academic, research or training allowance granted in educational or research

institutions.

(vi)         Allowance granted to meet expenditure on purchase/ maintenance of uniform for

performance of official duty.

Under Section 10(14)(ii), the following allowances have been prescribed as exempt.

What is CTC?
CTC is one of the generic term when a person talks about salary. CTC stands for Cost To
Company. It is the amount that the company in spending on hiring and sustaining an
employee.

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CTC includes the salary as well as the other benefits provided to an employee which can be
meal coupons, office space rent, Provident Fund, Medical Insurance, House Rent
Allowance (HRA) and any other element that cost to the company.

It may be noted that CTC varies from the actual income from salary that a person receives as
CTC also includes variables over and above the actual salary that a person is receiving.

Fully Taxable allowances:

 Dearness Allowance: The allowance is paid to the employees to cope with inflation.

 Entertainment Allowance: This is an allowance that is provided to the employees to

reimburse the expenses which are incurred on the hospitality.

 Overtime Allowance: Overtime allowance is the allowance which is paid to the

employees for working above the regular work hours.

 City Compensatory Allowance: This allowance is paid to those employees who

move to urban cities.

 Project Allowance: When an employer provides an allowance to the employees to

meet the project expenses.

 Tiffin/Meals Allowance: Employees may be provided with meal allowances in some

cases.

 Cash Allowance: Employer may also provide cash allowance in some cases like for
marriage or holiday purposes.

Partly Taxable allowances:

 House Rent Allowance: It is the allowance that an employer pays to his employee for
accommodation.

 Entertainment allowance

 Special allowances like allowance for travel, uniform, research allowance etc.

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  Special allowance to meet personal expenses like children’s education allowance,
children hostel allowance etc.

 Non-Taxable allowances:

 Allowances that is paid to the Govt. servants abroad: When the government

employee of India are paid allowances when they are serving abroad.

 Sumptuary allowances: Sumptuary allowances which are paid to the judges of HC

and SC are not taxed.

 Allowance paid by UNO: Allowances which is received by the employees of UNO

are fully exempt from tax.

 Compensatory allowance paid to judges: When a judge receives a compensatory

allowance, it is also not taxable.

It may be noted that a person can save tax on income from salary by getting the Tax Saving
Allowances.

Perquisites
Perquisites are those payments which are received by an employee from the employer over
and above the salary.

Perquisites that are taxable for all the employees:

 Rent free accommodation

 Club fee payments
 Movable assets
 Concession in accommodation rent
 Interest-free loans
 Educational expenses
 Insurance premium paid on behalf of employees

Perquisites that are taxable only to specified employees:

 Free gas, electricity etc. for domestic purpose

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  Concessional transport facility
 Concessional educational expenses
 Payment made to gardener, sweeper and attendant.

Perquisites that are exempt from tax:

 Medical benefits
 Health Insurance Premium
 Leave travel concession
 Staff Welfare Scheme
 Car, laptop etc. for personal use.

Points to consider:
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.

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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.

Perquisites

1. Perquisites are benefits such as rent-free accommodation, company’s car, etc.

2. Perquisites may be provided in cash or in kind.
3. Reimbursement of expenses incurred during office work is not a part of perquisites.
4. Unauthorised benefits obtained do not form part of Perquisites

Example: Mayuresh, being an railway employee, had been provided quarters by Central
Railways. He retired from railways on 31/03/2017 and was supposed to vacate the railway
quarters. However, he has been staying in the railway quarters till 31/12/2018. Rent free
accommodation till 31/03/2017 was taxed as perquisite under the head “Income from Salary”.
However, since he retired from employment and occupying the quarters without permission
from railways, this cannot be taxed as perquisite. This will form part of his income under the
head “Income from Other Sources” and will be taxed accordingly. 

 Perquisites may be fully taxable, partially taxable or fully exempt.

Fully and Partially Taxable Perquisites

The following perquisites are fully taxable in the hands of all employees receiving such
perquisites:

 1. Rent free accommodation:

The rent free accommodation provided to employees by their employer is taxable. Since the
employees are provided rent free accommodation, the amount of income accruing to them
cannot be determined by them. Accordingly, there is prescribed manner for calculating
income chargeable to tax as perquisite. 

 2. Concession in rent:

Some employers provide the employees with accommodation at rates lower than normal
market rates. This reduction in rates is known as concession in rent.

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The income chargeable to tax as perquisite as concession shall be determined as:

(i) Amount of Income chargeable to tax as above

(ii) Less: Amount of rent payable/ paid to the employer. 

   3. Payment by the employer in respect of an obligation of employee:

In this case, the amount is liable to be paid by the employee and the employer pays the same.

Example: Self-Assessment Tax of the employee is paid by the Employer.

Note: If the employer pays taxes on behalf on employees on non-monetary perquisites

provided to them, then such taxes are exempt in the hands of the employee. 

 4. Sweat Equity allotted or transferred to the assessee:

The Companies in appreciation of its employees or with an aim to achieve a particular

objective grants an option to the employees to subscribe equity shares at nil value or at
concessional rates than the current market prices to its workforce. If the employee exercises
such option and subscribes to such shares at nil or concessional rates, then it forms part of
perquisites. 

Valuation of Sweat Equity shall be as follows:

Note: If the shares have been received at a concessional rate then the amount paid to the
employer company shall be deducted from the value of perquisite calculated as above. 

 5. Amount of any Contribution to an approved superannuation fund:

Employer’s contribution to superannuation fund is a perquisite.

The tax treatment for approved superannuation fund is as follows:

1. Employer’s Contribution to Superannuation Fund: Upto Rs. 1,50,000/- exempt in the

hands of the employee.
2. Employee’s Contribution to Superannuation Fund is allowed as deduction under
Chapter VIA. (Subject to the limits specified)

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 3. Interest accumulated on such fund is exempt from tax.
4. Payment of balance of fund:
5. To the employee on retirement
6. To the employee on disablement
7. To the legal heirs on death of the employee 

6. Transport Facility and Valuation of Free or Concessional Tickets:

 The Value of any benefit or amenity resulting from the provision by an employer:

(i) who is engaged in the carriage of passengers or goods,

(ii) to any employee or to any member of his household for personal or private journey free
of cost or at concessional fare,

(iii) 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. 

7. Valuation of benefit of provision of domestic servants

If the employee or any member of his household are provided with domestic servants such as
sweeper, gardener, watchman or personal assistant then the benefits so received by the
employee are taxable as perquisites in the hands of the employee. 

 8. Utility such as gas, electricity or water supplied by employer

If the employer pays to the utility provider on behalf of the employee or if the employer
himself provides such utilities then the benefits so received by the employee are taxable as
perquisites in the hands of the employee. 

9. Free or concessional educational facilities

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If the employer provides free or concessional educational facilities from the educational
institutions maintained and owned by the employer or if free educational facilities are
allowed in any other educational institution then the benefits so received by the employee are
taxable as perquisites in the hands of the employee.

However, if the educational institution is maintained and owned by the employer and the
employer provides free or concessional education facilities to the employee himself or his
children and the benefits so received by the employee does not exceed Rs. 1,000/- per month
then such amount shall not be taxable in the hands of the employee as perquisite.

 10. Interest-free or concessional loan

The value of the benefit to the employee as a result of interest-free loan or concessional loan
for any purpose provided to the employee or any member of his household is a taxable
perquisite.

However, this perquisite will be not be chargeable to tax in any of the following cases:

1. If such loan is provided for the purpose of treatment of diseases such as cancer,
tuberculosis, etc. However, out of the amount of loan provided, if the employee
receives reimbursement from any medical insurance scheme, then such amount shall
not be exempt.
2. Amount of loans made to an employee does not exceed Rs. 20,000/-. 

11. Free or concessional food and non-alcoholic beverages

If the employer provides free or concessional food and/ or beverages such as tea, coffee etc.,
then the benefits so received by the employee are taxable as perquisites in the hands of the
employee. However, if the following are provided by the employer then they are not taxable
in the hands of employees as perquisites:

1. Free food and beverages such as tea, coffee etc. provided by the employer to an
employee during working hours at office or business premises less than Rs. 50/- per
meal.

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 2. Vouchers provided having value less than Rs. 50/- per meal
3. Tea or Snacks provided during working hours
4. Free food and beverages such as tea, coffee etc. provided during working hours
provided in a remote area or an offshore installation. 

 12. Gifts or Vouchers

Gift or vouchers received by employees or by member of his household on ceremonies or

occasions are taxable perquisites in the hands of the employees. However, if the value of such
gifts in totality do not exceed Rs. 5,000/- then such gifts are not taxable as perquisite in the
hands of the employees. 

13. Reimbursement of credit card expenses

If the employer reimburses expenses incurred by the employee or any member of his
household using a Credit card then the benefits so received by the employee are taxable as
perquisites in the hands of the employee.

However, if such expenses are made by the employee exclusively for official purposes and
the employer has documented the expenses incurred using the credit card then such
reimbursements are not taxable as perquisite in the hands of the employees. 

14. Club expenditure

If the employer pays or reimburses for the periodic subscription of a club for the employee or
any member of his household then the benefits so received by the employee are taxable as
perquisites in the hands of the employee.

However, if the following are provided by the employer then they are not taxable in the hands
of employees as perquisites:

1. If the use of health club, sports and such facilities are provided uniformly to all
employees by the employer.
2. Such expenditure is incurred wholly and exclusively for business purposes and if the
expenditure is properly documented by the employer. 

15. Use of movable assets

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If movable assets such as laptops are provided by the employer to the employee then the
benefits so received by the employees are not taxable in the hands of the employee. However,
other movable assets such as furniture, car etc are provided by the employer to the employee
than the benefits so received by the employee are taxable as perquisites in the hands of the
employee. 

 16. Transfer of movable assets

If the employer transfers any movable assets such as computers and electronic items, motor
cars etc. in the name of the employee than the the benefits so received by the employee are
taxable as perquisites in the hands of the employee. 

Exemptions
Gratuity

Gratuity is a payment received by an employee by his employer as a gratitude for the

employee’s services to the organization. It is over & above normal salary & other retirement
benefits received by an employee. 

Taxability of Gratuity
Pension

Pension means the employer provides to the employee a fixed monthly amount after his
retirement in consideration of past services. Pension can also be called as annuity.

There are 2 types of pension:

           1. Uncommuted Pension:

The employer provides the employee with monthly pension till the lifetime of the employee
starting post retirement.

Example: Manish worked for a company for past 20 years. After retirement the company
pays him Rs. 5,000/- per month in appreciation of his past services to the company.

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           2. Commuted Pension:

The employee may request his employer to pay him a lump sum amount of money on
retirement rather than providing a monthly amount. The employee can even request that out
of the monthly pension, a certain part lets say 50% be given to him on retirement as a lump
sum amount and receive the balance part monthly post retirement. This is known as
commuted pension.

Example: Manish worked for a company for past 20 years. After retirement the company
pays him Rs. 5,000/- per month in appreciation of his past services to the company. Now
Manish request the Company that instead of Rs. 5,000/- per month, he requires the entire
amount post his retirement itself. This is a case of commuted pension.

Taxation of Pension
Leave Encashment

In employment, the employer allows a few number of paid leaves to the employees. If the
employee fails to take leaves, then the employer may allow him to either accumulate the
leaves for future or lapse the leaves. If the employee does not take such leaves then the
balance of leaves accumulates. On retirement, the employer pays to the employee the salary
that would accrue to him on the accumulated leaves. This is known as leave encashment.
Leave Encashment is also known as leave salary. 

Taxability of Leave Encashment

Retrenchment Compensation

If the employer relieves an employee of his duties for reasons other than death,  retirement or
disciplinary action against the employee, then the employer is liable to compensate the
employee. The compensation received is known as Retrenchment Compensation. 

Taxability of Retrenchment Compensation

Least of the following is exempt:

1. Amount received
2. Rs. 5,00,000/-

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 3. 15/26*Average Salary of last 3 months*Completed years of service.

Voluntary Retirement Receipts

Sum received by an employee who opts for a Voluntary Retirement Scheme is known as
Voluntary Retirement Receipt. The employer provides such option to the employees in order
to reduce his surplus workforce. 

Taxability of Voluntary Retirement Receipts

Least of the following is exempt:

1. Actual amount received

2. Rs. 5,00,000/- 

Income-tax paid by employer

If the employer pays Income-tax on behalf of the employee on non-monetary perquisites then
such amount of Income-tax is exempt in the hands of the employee.

Example: Suresh receives a motor car for his personal use from his employer. This is taxable
in his hands as perquisite. The employer pays this tax on his behalf. The amount of tax paid
by the employer will be exempt in the hands of Suresh. 

Provident Fund

It is a savings scheme wherein a person saves a certain amount of money every year and
receives the cumulative amount of money on retirement. There are various types of Provident
Funds. They are as follows:

           1. Public Provident Fund (PPF):

It is a account which may be opened from a nationalised bank. Only individual can open such
PPF Accounts with annual contributions as low as Rs. 500/-.

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           2. Statutory Provident Fund:

This is applicable only to individuals employed with the Government, railways or all
recognised educational institutions. The Government and the employee contribute a certain
portion of the employee’s salary to this fund monthly.

           3. Recognised Provident Fund:

If the Provident Fund is approved by the Commissioner of Income-tax, it is known as

Recognized Provident Fund. In recognized provident fund the employer and the employee
contribute a certain portion of the salary of the employee to the fund.

           4. Unrecognised Provident Fund:

A fund, which is not recognised by Income Tax Authorities, in which the employer and the
employee contribute a certain portion of the salary of the employee is an Unrecognised
Provident Fund. 

Taxability of Provident Fund

           1. Public Provident Fund:

The amount of Contribution made to PPF in a Financial Year is allowed as Deduction U/s
80C subject to specified conditions. The amount of interest accrued is exempt from tax. If the
amounts are withdrawn from PPF in specified manner then such withdrawals are also exempt
from tax.

           2. Statutory Provident Fund:

The amount of Contribution made by the Government is exempt from tax. Employee’s
contribution to Statutory Provident Fund is allowed as Deduction U/s 80C subject to
specified conditions. The amount of interest accrued is exempt from tax. The amount
received on retirement out of such fund is exempt from tax.

           3. Recognised Provident Fund:

The amount of Contribution made by the employer is exempt from tax only if such
contribution is less than 12% of the salary of the employee. If the amount of contribution

27
exceeds 12% of the salary of the employee, then such amount in excess of 12% of the salary
of the employee shall be taxable in the hands of the employee. Employee’s contribution to
Statutory Provident Fund is allowed as Deduction U/s 80C subject to specified conditions.
The amount of interest accrued is exempt from tax only if such interest received is less than
9.5% per annum. If the interest accrued exceeds 9.5% per annum, then such amount in excess
of 9.5% interest per annum shall be taxable in the hands of the employee. The amount
received on retirement out of such fund is exempt from tax if the employee has been in
continuous service for immediately preceding 5 years. If the employee has not been in
continuous service for immediately preceding 5 years and his service is terminated due to
reasons beyond the control of the employee, then the amount received out of such fund is
exempt. f the employee has not been in continuous service for immediately preceding 5 years
and his employment is terminated due his negligence, then the amount received out of such
fund is taxable in the hands of the employee.

           4. Unrecognised Provident Fund:

The amount of contribution made by the employer is not taxable in the hands of the employee
during the years when such amounts are being contributed. Employee’s contribution to
Unrecognised Provident Fund is not allowed as deduction. The amount of interest accrued is
not taxable in the year of accrual. The amount received on retirement out of such fund is
required to be bifurcated in 4 categories in order to understand its taxability.

The 4 categories are:

1. Employee’s Contribution: The sum total of employee’s contribution made in earlier

years is not taxable in the year of receipt in the hands of the employee.
2. Employer’s Contribution: The sum total of employer’s contribution made in earlier
years is taxable in the year of receipt in the hands of the employee under the head
Income from Salaries.
3. Interest on Employee’s Contribution: The sum total of interest accrued in earlier years
on the employee’s contribution is taxable in the year of receipt in the hands of the
employee under the head Income from Other Sources.
4. Interest on Employer’s Contribution: The sum total of interest accrued in earlier years
on the employer’s contribution is taxable in the year of receipt in the hands of the
employee under the head Income from Salaries. 

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 Conclusion

Income from salary is the income or remuneration received by an individual for services he is
rendering or a contract undertaken by him. This clause essentially assimilates the
remuneration received by a person for the services provided by him under the contract of
employment.

This amount of remuneration will be considered as income for the purposes of Income Tax
Act only if there is an Employer and employee relationship between the person who is
making the payment and the person who is receiving the payment.

Employer and Employee Relationship – Any payment that is received by a person will be
treated as Income under Income Tax Act if there exist an Employer and employee
relationship between the payer and payee. For the purpose of qualifying income as income
from salary, their relationship should be that of a master and servant. Where a master is a
person who directs his employee that what is to be done and how it is to be done and servant
is the person who is liable to conduct that work in the manner told by his employer.

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