Amity Global Business

Amity Business
School, School
Bhubaneswar

Income from Salaries

Amity Global Business School,

Bhubaneswar
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Income Tax Act 1961

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Introduction
• In a Welfare State, the Government takes primary
responsibility for the welfare of its citizens, as in matters of
health care, education, employment, infrastructure, social
security and other development needs.
• To facilitate these, Government needs revenue.
• The taxation is the primary source of revenue to the
Government for incurring such public welfare expenditure.
• Taxes are compulsory or enforced contribution to the
Government revenue by public.
• Government may levy taxes on income, business profits
or wealth or add it to the cost of some goods, services,
and transactions.
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Direct & Indirect Taxes

• There are two types of taxes:
– Direct Tax and
– Indirect Tax
• Tax, of which incidence and impact fall on the same
person, is known as Direct Tax, such as Income Tax.
• On the other hand, tax, of which incidence and impact
fall on two different persons, is known as Indirect Tax,
such as GST, etc.
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• It means, in the case of Direct Tax,

– tax is recovered directly from the assessee,
– who ultimately bears such taxes,
– whereas in the case of Indirect Tax,
– tax is recovered from the assessee,
– who passes such burden to another person &
– is ultimately borne by consumers of such goods or services.
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Administration of Tax Laws

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ASSESSMENT YEAR (A.Y.) [SEC. 2(9)]

• Assessment year means the period of 12 months
commencing on the 1st day of April every year.
• It is the year (just after the previous year) in which
income earned in the previous year is charged to tax.
• E.g., A.Y. 2021-22 is a year, which commences on April
1, 2021 and ends on March 31, 2022.
• Income of an assessee earned in the previous year
2020-2021 is assessed in the A.Y. 2021-22.
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PREVIOUS YEAR OR UNIFORM PREVIOUS YEAR [SEC. 3]

• Previous Year means the financial year immediately
preceding the Assessment Year.
• Income earned in a year is assessed in the next year.
• The year in which income is earned is known as
Previous Year and the next year in which income is
assessed is known as Assessment Year.
• It is mandatory for all assessee to follow a uniform
previous year i.e. financial year (from 1st April to 31st
March) as previous year for Income-Tax purpose.
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ASSESSEE [SEC. 2(7)]

• “Assessee” means,
a. a person by whom any tax or any other sum of money
(i.e., penalty or interest) is payable under this Act
(irrespective of the fact whether any proceeding under
the Act has been taken against him or not);
b. every person in respect of whom any proceeding under
this Act has been taken (whether or not he is liable for
any tax, interest or penalty) for the assessment of his
income or loss or the amount of refund due to him;
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c. a person who is assessable in respect of income or loss

of another person; (minor/lunatic)
d. every person who is deemed to be an assessee under
any provision of this Act; and
e. a person who is deemed to be an ‘assessee in default’
under any provision of this Act. E.g. A person, who was
liable to deduct tax but has failed to do so, shall be
treated as an ‘assessee in default’.
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PERSON [SEC. 2(31)]

• The term person includes the following:
i) an Individual;
ii) a Hindu Undivided Family (HUF);
iii) a Company;
iv) a Firm;
v) an Association of Persons (AOP) or a Body of Individuals (BOI),
whether incorporated or not;
vi) a Local authority; &
vii) every artificial juridical person not falling within any of the
preceding categories.
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• Individual
– The word ‘individual’ means a natural person, i.e. human being.
“Individual” includes a minor or a person of unsound mind.
• Hindu Undivided Family (HUF)
– A Hindu Undivided Family (on which Hindu law applies) consists
of all persons lineally descended from a common ancestor &
includes their wives & unmarried daughters.
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• Company [Sec. 2(17)]

Company means:
a. any Indian company; or
b. any body corporate, incorporated under the laws of a foreign
country; or
c. any institution, association or body which is or was assessable
or was assessed as a company for any assessment year on or
before April 1, 1970; or
d. any institution, association or body, whether incorporated or not
and whether Indian or non-Indian, which is declared by general
or special order of the Central Board of Direct Taxes to be a
company.
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• Firm
– As per sec. 4 of Indian Partnership Act, 1932, partnership means
“relationship between persons who have agreed to share profits
of the business carried on by all or any one of them acting for
all”.
– Persons, who enter into such business, are individually known
as partners and such business is known as a Firm.
– A firm is, though not having a separate legal entity, but has
separate entity in the eyes of Income-tax Act.
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• Association of Persons (AOP) or Body of Individuals

(BOI)
– An AOP means a group of persons (whether individuals, HUF,
companies, firms, etc.) who join together for common
purpose(s).
– Every combination of person cannot be termed as AOP.
– It is only when they associate themselves in an income-
producing activity then they become AOP.
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– Whereas, BOI means a group of individuals (individual only) who

join together for common purpose(s) whether or not to earn
income.
– Co-heirs, co-donees, etc joining together for a common purpose
or action would be chargeable as an AOP or BOI.
– In case of income of AOP, the AOP alone shall be taxed and the
members of the AOP cannot be taxed individually in respect of
the income of the AOP
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• Local Authority
– As per Sec. 3(31) of the General Clause Act, a local authority
means a municipal committee, district board, body of Port
Commissioners, Panchayat, Cantonment Board, or other
authorities legally entitled to or entrusted by the Government
with the control and management of a municipal or local fund.
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• Artificial Juridical Person

Artificial juridical person are entities –
– which are not natural person;
– has separate entity in the eyes of law;
– may not be directly sued in a court of law but they can be sued
through person(s) managing them
• E.g: Deities, Idols, University, Bar Council, etc.
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Determine the status of the following:

a) Howrah Municipal Corporation

b) Corporation Bank Ltd.
c) Mr. Amitabh Bachchan
d) Amitabh Bachchan Corporation Ltd.
e) A joint family of Sri Ram, Smt. Ram and their son Lav
and Kush
f) Calcutta University
g) X and Y who are legal heirs of Z
h) Sole proprietorship business
i) Partnership Business
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a) Local authority
b) Company
c) Individual
d) Company
e) HUF
f) Artificial juridical person
g) BOI
h) Individual
i) Firm
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Residential Status of Individuals

• For the purpose of income tax in India, the income tax
laws in India classify taxable persons as:
– A resident
– A resident not ordinarily resident (RNOR)
– A non-resident (NR)
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• Resident
• A taxpayer would qualify as a resident of India if he
satisfies one of the following 2 conditions:
– He is in India in the previous year for a period of 182 days or
more [Sec. 6(1)(a)]; or
– He is in India for a period of 60 days or more during the previous
year and for 365 or more days during 4 previous years
immediately preceding the relevant previous year [Sec. 6(1)(c)]
• Non-Resident in India
– An assessee who is not satisfying sec. 6(1) shall be treated as a
non-resident in India for the relevant previous year.
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1. Sam came to India first time during the P.Y. 2020-21.

During the previous year, he stayed in India for (i) 50
days; (ii) 183 days; & (iii) 153 days. Determine his
residential status for the A.Y. 2021-22.
2. Andy, a British national, comes to India for the first time
during 2016-17. During the financial years 2016-17,
2017-18, 2018-19, 2019-20 and 2020-21, he was in
India for 55 days, 60 days, 80 days, 160 days and 70
days respectively. Determine his residential status for
the assessment year 2021-22.
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• Resident but not ordinarily resident (RNOR)

• If an individual qualifies as a resident, the next step is to
determine if he/she is a Resident and ordinarily resident
(ROR) or an RNOR.
• He will be a ROR if he meets both of the following
conditions:
– Has been a resident of India in at least 2 out of 10 years
immediately previous years and
– Has stayed in India for at least 730 days in 7 immediately
preceding years
• If a resident individual does not satisfy both additional
conditions as given above, he is “Resident but not
ordinarily resident in India”.
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Income Sec 2(24)

• Cash Vs Kind
– Income may be received in cash or in kind.
– Income received in kind is to be valued as per the rules
prescribed and if there is no specific direction regarding
valuation in the Act or Rules, it may be valued at market price.
• Source of income
– Income may be from a temporary source or from a permanent
source.
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• Method of Accounting
– In case of income under the head “Salaries”, “Income from
house property” and “Capital gains” method of accounting is
irrelevant.
• Notional income
– A person cannot make profit out of transaction with himself.
– Hence, goods transferred from one department to another
department at a profit, shall not be treated as income of the
business.
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• Loss
– Income also includes negative income.
• Disputed income
– In case of dispute regarding the title of income, assessment of
income cannot be withheld and such income, normally, be taxed
in the hands of recipient.
• Lump-sum receipt
– There is no difference between income received in lump sum or
in instalment.
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• Reimbursement
– Mere reimbursement of expenses is not an income.
• Legality
– The Act does not make any difference between legal or illegal
income.
• Double taxation
– Same income cannot be taxed twice.
• Contingent income
– A contingent or anticipated income is not taxable.
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• Embezzlement
– Money embezzled is a gain to the embezzler and, therefore, falls
within the wider definition of income
• Pin money
– Pin money is money received by wife for her personal expenses
& small savings made by a woman from money received from
her husband for meeting household expenses.
– Such receipt is not treated as income.
• Note: Income on investment out of pin money shall be
treated as income.
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Heads of Income [Sec 14]

• According to Sec.14 of the Act, all income of a person
shall be classified under the following five heads:
1. Salaries;
2. Income from house property;
3. Profits and gains of business or profession;
4. Capital gains;
5. Income from other sources.
• For computation of income, all taxable income should fall
under any of the five heads of income as mentioned
above.
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GROSS TOTAL INCOME [SEC. 80B(5)]

• Gross total income is the aggregate of income under all
the five heads of income after adjusting the set-off &
carry forward of losses.

• Deductions under chapter VIA is provided from GTI, to

arrive at Total income or taxable income.
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ROUNDING-OFF OF TOTAL INCOME [SEC. 288A]

• The total income so computed will have to be rounded
off to the nearest multiple of 10, i.e., if the last figure in
the ‘rupee element’ is 5 or more, it should be rounded off
to the next higher amount, which is a multiple of 10.
• The ‘paise’ element should be ignored.
• Thus, if the total income works out to Rs 41,645, it
should be rounded off to Rs 41,650, but if it works out to
Rs 41,644.98, it should be rounded off to Rs 41,640.
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ROUNDING-OFF OF TAX [SEC. 288B]

• The tax calculated on the total income should be
rounded off to the nearest Rs 10.
• Amount of tax (including TDS or advance tax), interest,
penalty, etc. and refund shall be rounded off to the
nearest Rs 10.
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Capital Vs Revenue
• Receipts
– A capital receipt is not liable to tax, unless specifically provided
in the Act, whereas, a revenue receipt is not exempted, unless
specifically provided in the Act.
– Further, capital receipts are to be charged to tax under the head
“Capital Gains” and revenue receipts are taxable under other
heads.
– The Act does not provide exhaustive definition of the income,
thus, distinction between capital receipts and revenue receipts is
not easily made.
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• However, based on a number of judicial

pronouncements, the following principles are worthwhile
to note:
• Receipt in lump sum or in Instalments:
– Whether any income is received in lump sum or in instalments, it
will not make any difference as regards its nature, e.g., an
employee is to get a salary of Rs 10,000 p.m. Instead of this he
enters into an agreement to get a sum of Rs 3,60,000 in lump
sum to serve for a period of 3 years.
– The receipt where it is monthly remuneration or lump sum for 3
years is a revenue receipt.
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• Nature of receipt in the hands of recipient:

– Whether a receipt is capital or revenue will be determined in the
hands of the persons receiving such income.
– No attention will be paid towards the source from which the
amount is coming.
– Salary even if paid out of capital by a new business will be it
revenue receipt in the hands of employee.
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• Expenses
– Similarly, a capital expenditure is not allowable as
expenses, unless specifically allowed in the Act,
whereas, a revenue expenditure is allowable as
expenses, unless specifically disallowed in the Act.
– Based on a number of judicial pronouncements, the
following principles are worthwhile to note:
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• Capital assets belonging to third parties:

– Even though a expenditure results in the creation of a capital
asset, if the capital asset belongs to a third party, such expenses
will be treated as revenue expenditure.
• Payment made to rival dealer to ward off competition in
business would constitute capital expenditure.
• If the expenditure is a part of the working expenses in
ordinary commercial trading, it is not capital but revenue
expenditure.
• If expenditure is incurred for ensuring the regular supply
of raw material, maybe for period extending over several
years, it is on revenue account
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EXEMPTED INCOMES
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Leave Travel Concession [Sec 10(5)]

• If an employee goes on travel (on leave) with his family
and travelling cost is reimbursed by the employer, then
such reimbursement is fully exempted.
• Notes:
– Journey may be performed during service or after retirement.
– Employer may be present or former.
– Journey must be performed to any place within India.
– In case, journey was performed to various places together, then
exemption is limited to the extent of cost of journey from the
place of origin to the farthest point reached, by the shortest
route.
– Employee may or may not be a citizen of India.
– Stay cost is not exempt.
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Death-cum-retirement-gratuity [Sec. 10(10)]

• Gratuity is a retirement benefit given by the employer to

the employee in consideration of past services
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• Case A: Gratuity received during continuation of service

– Gratuity received during continuation of service is fully taxable in
the hands of all employee (whether Government or non-
Government employee).
• Case B: Gratuity received at the time of termination of
service by Government employee
– Gratuity received at the time of termination of service by
Government employee is fully exempt from tax u/s 10(10) (i).
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• Case C: Gratuity received at the time of termination of

service by non–government (including foreign
government) employee, covered by the Payment of
Gratuity Act.
• In such case, minimum of the following shall be
exempted from tax u/s 10(10)(ii):
1. Actual Gratuity received;
2. Rs 20,00,000; or
3. 15 working days salary for every completed year of service
[Arithmetically, 15/26 * Completed year of service * Salary p.m.]
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• Notes:
a) Completed year of service includes any fraction in excess of 6
months. (e.g. 7 years 9 months will be treated as 8 years; 7
years 5 months will be treated as 7 years and 7 years 6 months
will be treated as 7 years).
b) Salary here means Basic + DA, last drawn
• Illustration 1
– Ashok, an employee of ABC Ltd., receives Rs 2,05,000 as
gratuity under the Payment of Gratuity Act, 1972. He retires on
10th September, 2020 after rendering service for 35 years and 7
months. The last drawn salary was Rs 2,700 per month.
Calculate the amount of gratuity chargeable to tax.
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• Case D: Gratuity received at the time of termination of

service by non-government employee (including foreign
government employee) not covered under the Payment
of Gratuity Act.
• Gratuity received at the time of termination of service by
non-government employee being not covered under the
Payment of Gratuity Act shall be exempted from tax u/s
10(10)(iii) to the extent of lower of the following:
1. Actual Gratuity received;
2. Rs 20,00,000; and
3. ½ * Completed year of service * Average Salary p.m.
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• Notes:
a) While calculating completed year of service ignore any fraction
of the year. (e.g. 7 years 9 months will be treated as 7 years
only)
b) Average Salary here means, Basic + DA# + Commission (being
a fixed percentage on turnover) being last 10 months average
salary, immediately preceding the month of retirement. (E.g. If an
employee retires on 18/11/2020 then 10 months average salary
shall be a period starting from Jan’ 2020 and ending on Oct’
2020).
– # If DA is not forming a part of retirement benefit then the same
shall not be included in salary for above purpose. However, DA
itself shall be fully taxable.
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• Illustration 2:
• Mr. Oldman retired from his job after 29 years 6 months and 15 days
of service on 17/12/2020 and received gratuity amounting Rs
4,00,000. His salary at the time of retirement was basic Rs 6,000
p.m., dearness allowance Rs 1,200 p.m., House rent allowance Rs
2,000, Commission on turnover 1%, Commission on profit Rs 5,000.
He got an increment on 1/4/2020 of Rs 1,000 p.m. in Basic.
Turnover achieved by assessee Rs 1,00,000 p.m. Calculate his
taxable gratuity if he is a —
a) Government employee
b) Non-Government employee, covered by the Payment of Gratuity Act;
c) Non-Government employee not covered by the
Payment of Gratuity Act
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Leave Encashment [Sec. 10(10AA)]

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• Case A: Leave salary received during continuation of

service
– Leave salary during continuation of service is fully taxable in the
case of the Government employee as well as other employees
[Sec. 17(1)(va)].
• Case B: Leave salary received by Government
employee on termination of service
– At the time of termination of service, leave salary received by the
Central or State Government employee is fully exempted u/s
10(10AA)(i).
• Taxpoint: Government employee here does not include
employee of local authority or public sector undertaking
or foreign Government employee.
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• Case C: Leave salary received by non-Government

employee on termination of service
– At the time of termination of service, leave salary received by a
non-Government employee (including employee of foreign
Government, local authority, public sector undertaking) is
exempted to the minimum of the following u/s 10(10AA)(ii):
a) Actual amount received as leave salary
b) Rs 3,00,000/-
c) 10 * Average salary p.m.
d) To the maximum of 30 days (normally taken as 1 month) average
salary(1) for every completed year of service(2), subject to
deduction for actual leave availed during the tenure of service.
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• Academically:
• [{(1 * completed year of service) – leave actually taken in terms of
month} * average salary p.m.]
1. Average salary means Basic + DA# + Commission (as a fixed
percentage on turnover) being last 10 months average salary
ending on the date of retirement or superannuation. (e.g. if an
employee retires on 18/11/2020 then 10 months average salary
shall be a period starting from 19th Jan’ 2020 and ending on 18th
Nov’ 2020).
• # If DA is not forming a part of retirement benefit then the same shall
not be included in salary for the above purpose. However, DA itself
shall be fully taxable.
2. While calculating completed year of service, ignore any fraction of
the year. E.g. 10 years 9 months shall be taken as 10 years.
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• Illustration 3:
a) Mr. Bhanu is working in Zebra Ltd. since last 25 years 9
months. Company allows 2 months leave for every
completed year of service to its employees. During the
job, he had availed 20 months leave. At the time of
retirement on 10/8/2020, he got Rs 1,50,000 as leave
encashment. As on that date, his basic salary was Rs
5,000 p.m., D.A. was Rs 2,000 p.m., Commission was
5% on turnover + Rs 2,000 p.m. (Fixed p.m.). Turnover
effected by the assessee during last 12 months (evenly)
Rs 5,00,000. Bhanu got an increment of Rs 1,000 p.m.
from 1/1/2020 in basic and Rs 500 p.m. in D.A. Compute
his taxable leave encashment salary.
b) How shall your answer differ if the assessee had taken 2
months leave instead of 20 months, during his
continuation of job.
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• Illustration 4:
• Mr. Das retired on 31/3/2021. At the time of retirement, 18 months
leave was lying to the credit of his account. He received leave
encashment equivalent to 18 months Basic salary Rs 1,26,000. His
employer allows him 1½ months leave for every completed year of
service. During his tenure, he availed of 12 months leave. At the
time of retirement, he also gets D.A. Rs 3,000. His last increment of
Rs 1,000 in basic was on 1/4/2020. Find taxable leave encashment.
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Commutation of Pension [Sec. 10(10A)]

• Pension is the amount received by the employee after
retirement.
• Based on the type of payment, the pension can be
divided into the following two parts-
1. Commuted pension – lump sum payment received, in lieu of the
periodic pension; and
2. Uncommuted pension – periodic pension received (monthly,
quarterly or annually).
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• The commuted pension received is exempted under

section 10(10A) in the following manner-
• The commuted value of pension received by the
government employees (listed below) are fully exempted
under section 10(10A)–
– Employees of the central government.
– Employees of state government.
– Employees of the local authority.
– Employees of a statutory corporation.
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• The commuted value of pension received by any other

employees would be exempted in the following manner-
– Cases, wherein, the employees receive any gratuity
#–
• One third of total pension (which assessee is normally entitled for)
commuted is exempt.
– In any other case –
• One half of total pension (which assessee is normally entitled for)
commuted is exempt.
• The commuted pension received from the pension funds
[referred under section 10(23AAB)] set up by the Life
Insurance Corporation or any other insurer are fully
exempt.
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• Illustration 5:
• Mr. Amit has retired from his job on 31/3/2020. From
1/4/2020, he was entitled to a pension of Rs3,000 p.m.
On 1/8/2020, he got 80% of his pension commuted and
received Rs1,20,000. Compute taxable pension if he is:
a) Government employee;
b) Non-Government employee & not receiving gratuity
c) Non-Government employee (receiving gratuity, but not covered
by the Payment of Gratuity Act)
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Workmen’s Retrenchment Compensation [Sec. 10(10B)]

• Any compensation received by a worker at the time of
retrenchment is exempted to the extent of minimum of
the following:
a) Actual amount received;
b) Rs 5,00,000; or
c) 15 days’ average pay, for every completed year of service or any
part thereof in excess of 6 months.
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Payment under Voluntary Retirement Scheme [Sec. 10(10C)]

• Voluntary retirement compensation received or
receivable by an employee is eligible for exemption.
• Amount of exemption
– Exemption shall be minimum of the following -
• a) Actual amount received as per guidelines; or
• b) Rs 5,00,000.
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Tax paid by Employer on behalf of Employee on Non-

monetary Perquisites u/s 17(2) [Sec. 10(10CC)]

• Tax on non-monetary perquisite paid by employer on

behalf of employee.
• With effect from A.Y. 2003-04 a new sec. 10(10CC) has
been inserted which provides that income tax paid by
employer on behalf of employee on income, being non-
monetary perquisite, is not a taxable perquisite.
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Sum received under a Life Insurance Policy [Sec. 10(10D)]

• Any sum received under a life insurance policy including
bonus on such policy is wholly exempt from tax.
• However, exemption is not available on -
– any sum received u/s 80DD(3) or u/s 80DDA(3); or
– any sum received under a Keyman insurance policy; or
– any sum received under an insurance policy issued on or after
1-4-2012 in respect of which the premium payable for any of the
years during the term of the policy exceeds 10% of the actual
capital sum assured.
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Payment from Statutory or Public Provident Fund [Sec. 10(11)]

• Any sum received of the statutory provident fund relating

to the contribution, amount and interest on his
termination will be exempted.
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Payment from Recognised Provident Fund [Sec. 10(12)]

• Provisions of section 10(12) exempt the accumulated

balance, due and payable, to the employee participating
in the Recognized Provident Fund.
• The exemption is available to the extent covered in Rule
8 of Part A of the Fourth Schedule.
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• As per rule 8 of part A of the fourth schedule, accumulated

balance payable to an employee covered in a Recognized
Provident Fund shall be exempted only under any of the
following cases-
• The employee has provided continuous service, with his
employer, for a period of 5 years or more.
• In case the service of the employee is terminated before
the period of 5 years, the reason for termination should be
any of the following-
– Termination of service due to Employee’s ill-health; or Termination
of service by the contraction; or Termination of service due to
discontinuation of employer’s business; or Termination of service
due to any reason which is beyond the control of the employee.
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• In case of cessation of employment, the employee takes

employment with any other employer, then, the
accumulated balance (due and payable) to the employee
is transferred to his individual account in any Recognized
Provident Fund managed by such other employer.
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House Rent Allowance [Sec. 10(13A)]

• An allowance to meet the expenses in connection with
the rent of the house, by whatever name called.
• Tax Treatment:
– Minimum of the following is exempted from tax:
a. Actual HRA received.
b. An amount equal to 50% of salary (when house is
situated in a metro city) or 40% of salary (when
house is situated in any other place) for the
relevant period
C. The excess of rent paid over 10% of salary.
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• Notes:
a) Salary shall be determined on due basis for the period for which the
employee occupies rented accommodation in the previous year and
gets HRA.
b) Exemption is not available if employee lives in his own house, or in a
house for which he does not pay any rent.
c) For criteria of 50% or 40% of salary as deduction, place of
employment is not significant but place where the house is situated
is important.
d) Deduction from HRA depends on Salary of the employee, Amount of
HRA, place of residence (not place of employment), rent paid by the
employee.
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• Illustration 8.
• X, a resident of Ajmer, receives Rs 48,000 as basic salary during the
previous year 2020-21. In addition, he gets Rs 4,800 as dearness
allowance forming part of basic salary, 7% commission on sales
made by him (sale made by X during the relevant previous year is
Rs 86,000) and Rs 6,000 as house rent allowance. He, however,
pays Rs 5,800 as house rent. Determine the quantum of exempted
house rent allowance.
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Children Education Allowance

• An allowance to meet the expenses in connection with
education of children, by whatever name called.
• Treatment: Minimum of the following is exempted from
tax -
a) Rs 100 per month per child (to the maximum of two children)
b) Actual amount received for each child (to the maximum of two
children)
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Rent Free Accommodation

• The value of perquisite is determined as per the

following table:
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• Salary for the purpose of Rent free accommodation: Salary here

means:
• Basic + Dearness allowance/pay (if it forms a part of retirement
benefit) + Bonus + Commission + Fees + All other taxable
allowances (only taxable amount) + Any other monetary payment by
whatever name called (excluding perquisites and 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)
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Illustration
• Mr. Chauhan has the following salary structure:
a) Basic Salary Rs 5,000 p.m.
b) Entertainment Allowance Rs 1,000 p.m.
c) Education Allowance Rs 500 p.m. (he has three children)
d) DA Rs 3,000 p.m.
e) Fees Rs 5,000 p.a.
f) Bonus Rs 10,000 p.a.
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g) Professional tax of employee paid by employer Rs 2,000 for the

year
h) He has been provided a rent-free accommodation in Mumbai.
i) 60% of DA only forms part of retirement benefits
• Compute taxable value of accommodation in the hands
of Mr. Chauhan in the following cases:
(i) The employer owns such accommodation.
(ii) The employer hires such accommodation at a monthly rent of
Rs 900.
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Medical Facility
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• Notes:
a) Hospital includes a dispensary, a clinic or a nursing home.
b) For this purpose ‘family’ means: Spouse, children of the individual;
and Parents, brothers, sisters of the individual, wholly or mainly
dependent on him.
c) Fixed Medical Allowance is fully taxable.
d) The expenditure on medical treatment by the employer may be by
way of payment or reimbursement.
e) The perquisite is taxable in the hands of specified employee,
however if the bills are issued in the name of employee and
reimbursed by the employer, then it shall be taxable in the hands of
all employees.
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Illustration
• Find taxable amount of perquisite in the following cases:
1. Y has been allowed a fixed medical allowance of Rs 2,000 p.m.
2. Apart from reimbursement of petty medical bill of Rs 25,000, Z and his
family get medical treatment in a dispensary maintained by the
employer. Value of facility provided to Z and his family members during
the previous year are as follows:
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STANDARD DEDUCTION
• Standard Deduction [Sec. 16(ia)]
– Lower of the following shall be allowed as standard
deduction to all employees:
a. Rs 50,000
b. Amount of gross salary
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ENTERTAINMENT ALLOWANCE [SEC. 16(ii)]

• Entertainment allowance is initially included in taxable
allowances as fully taxable.
• Thereafter, a deduction is allowed under this section
from gross taxable salary.
• However, deduction u/s 16(ii) shall be available to the
Government employee only.
• Deduction for Entertainment allowance being minimum
of the following:
– Actual Entertainment Allowance
– Rs 5,000/-
– 20% of Basic Salary.
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TAX ON EMPLOYMENT OR PROFESSIONAL TAX [SEC. 16(iii)]

• Tax on employment, profession, trade, etc. will be

allowed as deduction on cash basis, whether paid by
employee or by employer (on behalf of employee) from
gross taxable salary.
• Note:
– If employer (on behalf of employee) pays Professional tax then:
– Firstly, it is to be included as taxable perquisite; and
– Further, it is allowed as deduction u/s 16(iii).
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• Mr. Rohit a non-govt. employee has the following salary

details:
– Basic Salary Rs 5000 p.m.
– DA Rs 2000 p.m.
– Entertainment Allowance Rs 300 p.m.
– Professional tax paid by employee Rs 600
– LIC premium paid by employer Rs 3600
– Income tax paid by employee Rs 2000
– Professional tax paid by employer Rs 1600
• Compute his taxable salary

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Work it out
• Compute taxable salary of Miss Pooja from the following
details:
– Basic Rs 20000 pm
– DA Rs 10000 pm
– HRA (Resides in Non-metro city) Rs 10000 pm
(Rent paid Rs 12000 pm)
– City Compensatory Allowance Rs 1000 pm
– Medical Allowance Rs 2000 pm
– Entertainment Allowance Rs 3000 pm
– Professional Tax (Paid by employer) Rs 300 pm
– Tiffin Allowance Rs 200 pm
– Servant Allowance Rs 300 pm

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Work it out
• Compute taxable salary of Mrs Brigenja from the following
details:
– Basic Rs 15000 pm
– DA Rs 7500 pm
– Rent free accommodation (Resides in Bangaluru city)
(Accommodation is owned by employer)
– City Compensatory Allowance Rs 1000 pm
– Medical Allowance Rs 2000 pm
– Entertainment Allowance Rs 3000 pm
– Professional Tax (Paid by employer) Rs 300 pm
– Uniform Allowance Rs 200 pm
(Actual Expenditure: Rs 1500)
– Research Allowance Rs 300 pm
(Actual Expenditure: Rs 2500)

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