Legal and Tax Aspects of

Business

MMS – I

Topic : Salary Income

Prof. I.R.Panjwani

Name : Vishal Singh

Div : C Roll No. 2018163
 Index
Sr. Contents Page
no. no.
1 Introduction 3
2 Statutory Analysis (Sections) 7
11 Judicial Analysis (Case Laws) 22
12 Conclusion 24
13 Bibliography 25

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 Introduction

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. Salary
income could be in any form such as gift, pension, gratuity, usual remuneration etc. 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.
Who can receive Salary ?
Salary is a compensation for personalized services which could be provided by ordinary human
being and not an association or entity. Hence, salary income is chargeable in the hands of an
individual only. No other type of individual such as firm or HUF, LLP or Company can earn
salary income.
Also, if the association of employer and employee prevails, the income that would be charged
would be classed under the head “Salaries”. It does not matter whether the employee is working
full time or a part-time. Finally, any payment received by an employee from his present, former
or prospective employer will be charged to tax under the head “Salaries”.
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.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.

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Meaning of Salary.
The salary for the purpose of calculation of income from salary includes:

 Wages;
 Pension;
 Annuity;
 Gratuity;
 Advance Salary paid;
 Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages;
 Annual accretion to the balance of Recognized Provident Fund;
 Leave Encashment;
 Transferred balance in Recognized Provident Fund;
 Contribution by Central Govt. or any other employer to Employees Pension A/c as referred
in Sec. 80CCD.

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.
Basis of charge [Section 15]:
a. Any salary due from an employer or a former employer to an assessee in the previous year ,
whether paid in that previous year or not.
b. Any salary paid or allowed to him in the previous year by or on behalf of an employer or a
former employer though not due in that previous year or before it became due to him.
c. Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer
or a former employer, if not charged to income tax in any earlier previous year.
Important Points
# If any salary paid in advance is included in the total income of any person for any previous year,
it shall not be included again in the total income of the person when the salary becomes due.
# Any salary, bonus, commission or remuneration due to or received by a partner of a firm from
the firm shall not be regarded as salary for the purpose of this section. The same shall be taxable
under the head Profits and gains of business and profession as per section 28 of Income Tax
Act,1961.

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TAX FREE SALARY
When the employee receives tax-free salary from his employer, it means employer himself pays
the tax which is due on salary of such employee and for the purpose of computation of INCOME
FROM SALARIES under Income Tax act 1961, such amount will be added to his salary.
SALARY PAID BY FOREIGN GOVERNMENT /ENTERPRISES
Salary paid by foreign Govt. /enterprises to its employees serving in India is taxable under head
Salaries, unless it is specifically exempt under section 10
ALLOWANCES :- Payments in cash made by the employer to his employees usually at regular
intervals, other than salary are known as allowances. In other words, it is defined as a fixed quantity
of money given regularly in addition to salary for meeting specific requirements of the employees.
From Income Tax point of view, there are 3 types of allowances which are as under:- a. TAXABLE
ALLOWANCES
b. ALLOWANCES EXEMPT UPTO SPECIFIED LIMITS
c. FULLY EXEMPT ALLOWANCES
1. TAXABLE ALLOWANCES are those allowances which are fully taxable under Income tax
act, 1961.While computing taxable salary whole amount is added into the salary. Following are
the allowances which are fully taxable:
- Dearness Allowance and dearness pay
- Fixed medical allowance - Warden/ Proctor allowance
- Tiffin allowance - Deputation allowance
- Servant allowance - Overtime allowance
- Non practicing allowance - Hill allowance
- Other allowances like City Compensatory allowance, Telephone allowance, Holiday allowance,
Special qualification allowance, etc.
DEARNESS ALLOWANCE : This allowance is given to employees on account of high prices.
Sometimes Dearness Allowance is given as Dearness pay. Normally we think that these 2 words
are synonyms, but in actual they have different treatment. Dearness Allowance is an allowance
granted to the employees to compensate for the cost of inflation. However, when certain portion
of the Dearness Allowance is converted into Dearness Pay, then the applicable allowance would
get calculated on (Basic Pay + Dearness Pay). For instance normally Dearness Allowance is
calculated as a % of Basic Pay. In cases where there is Dearness Pay, then the Dearness Allowance
would get calculated on (Basic Pay + Dearness Pay). To that extent the employee would get
increased amount in absolute terms

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HOUSE RENT ALLOWANCE :- HRA is given to meet the cost of a rented house taken by the
employee for his stay. The Income Tax Act allows for deduction in respect of the HRA paid to
employees. The exemption on HRA is covered under Section 10(13A) of the Income Tax Act and
Rule 2A of Income Tax Rules. HRA is exempt to the extent of the minimum of following 3
amounts: - Actual Amount Received, - Excess of Rent paid by the assessee over 10 % of salary
due to him for the relevant period, - 50% of the salary if residential house is situated at Mumbai
,Kolkata, Delhi, Chennai . - 40% of the salary if residential house is situated at city other than
above metropolitan cities.
ENTERTAINMENT ALLOWANCE :- It is an allowance given by an employer to his employee.
It is first included in income from salary under section 15 and then deduction is allowed to a govt.
employee under sec 16(ii).
FULLY EXEMPTED ALLOWANCES:- There are certain allowances which are fully exempt
under Income Tax Act,1961 :-
1.Foreign Allowance – This allowance is usually paid by the government to an Indian citizen
outside India for rendering services in abroad. It is not taxable atall. There may be several types of
foreign allowances e.g. Overseas allowance, Children Education allowance,etc. Important point:
This Exemption is available only to government employees and they must be citizen of India.
2. Sumptuary allowances – These allowances are given to High Court/ supreme Court Judges and
are fully exempt from tax.
3. Allowance From UNO – Allowances paid by UN organizations to its employees are fully
exempt.
4. Per Diem Allowance – It means Per Day Allowance. If per Diem Allowance is paid for the use
of hotel, boarding and lodging facilities to an employee, any surplus accruing to him from such
allowance are exempt from tax.

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 Statutory Analysis (Sections)
Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier.
Existence of relationship of employer and employee is must between the payer and payee to tax
the income under this head

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.
Taxability of various components of salary:

S.No. Section Particulars Taxability/Exemption

1. 17 Basic salary Fully taxable

2. 17 Dearness Allowance (referred Fully taxable

to as ‘DA’)

3. 17 Bonus, fees or commission Fully taxable

A. Allowances

4. 10(13A) read House rent allowance Least of the following is exempt:

with Rule 2A a) Actual HRA Received
b) 40% of Salary (50%, if house situated
in Mumbai, 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

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 [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 to Rs. 3,200 per month granted to an

an employee to meet employee, who is blind or deaf and
expenditure for the purpose of dumb or orthopedically handicapped
commuting between place of with disability of lower extremities
residence and place of duty

8. Sec. 10(14) Allowance granted to an Amount of exemption shall be lower of

employee working in any following:
transport business to meet his a) 70% of such allowance; or
personal expenditure during his b) Rs. 10,000 per month.
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.

9. 10(14) Conveyance allowance granted Exempt to the extent of expenditure

to meet the expenditure on incurred for official purposes
conveyance in performance of
duties of an office

10. 10(14) Travelling allowance to meet Exempt to the extent of expenditure

the cost of travel on tour or on incurred for official purposes
transfer

11. 10(14) Daily allowance to meet the Exempt to the extent of expenditure
ordinary daily charges incurred incurred for official purposes
by an employee on account of
absence from his normal place
of duty

12. 10(14) Helper/Assistant allowance Exempt to the extent of expenditure

incurred for official purposes

13. 10(14) Research allowance granted Exempt to the extent of expenditure

for encouraging the academic incurred for official purposes
research and other
professional pursuits

14. 10(14) Uniform allowance Exempt to the extent of expenditure

incurred for official purposes

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15. 10(7) Any allowance or perquisite Fully Exempt
paid or 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)

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 to Fully Exempt

its employees

19. 10(45) Allowances to Retired Exempt subject to maximum of Rs.

Chairman/Members of UPSC 14,000 per month for defraying the
(Subject to certain conditions) services of an orderly and for meeting
expenses incurred towards secretarial
assistant on contract basis.

20. Sec. 10(14) read Special compensatory Amount exempt from tax varies from Rs.
with Rule 2BB Allowance (Hilly Areas) 300 to Rs. 7,000 per month.
(Subject to certain conditions
and locations)

21. Sec. 10(14) read Border area, Remote Locality Amount exempt from tax varies from Rs.
with Rule 2BB or Disturbed Area or Difficult 200 to Rs. 1,300 per month.
Area Allowance (Subject to
certain conditions and
locations)

22. Sec. 10(14) read Tribal area allowance in (a) Up to Rs. 200 per month is exempt
with Rule 2BB Madhya Pradesh (b) Tamil
Nadu (c) Uttar Pradesh (d)
Karnataka (e) Tripura (f) Assam
(g) West Bengal (h) Bihar (i)
Orissa

23. Sec. 10(14) read Compensatory Field Area Up to Rs. 2,600 per month is exempt
with Rule 2BB Allowance. If this exemption is
taken, employee cannot claim
any exemption in respect of

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 border area allowance (Subject
to certain conditions and
locations)

24. Sec. 10(14) read Compensatory Modified Area Up to Rs. 1,000 per month is exempt
with Rule 2BB Allowance. If this exemption is
taken, employee cannot claim
any exemption in respect of
border area allowance (Subject
to certain conditions and
locations)

25. Sec. 10(14) read Counter Insurgency Allowance Up to Rs. 3,900 per month is exempt
with Rule 2BB granted to members of Armed
Forces operating in areas away
from their permanent locations.
If this exemption is taken,
employee cannot claim any
exemption in respect of border
area allowance (Subject to
certain conditions and
locations)

26. Sec. 10(14) read Underground Allowance to Up to Rs. 800 per month is exempt
with Rule 2BB employees working in
uncongenial, unnatural climate
in underground mines

27. Sec. 10(14) read High Altitude Allowance a) Up to Rs. 1,060 per month (for
with Rule 2BB granted to armed forces altitude of 9,000 to 15,000 feet) is
operating in high altitude areas exempt
(Subject to certain conditions b) Up to Rs. 1,600 per month (for
and locations) altitude above 15,000 feet) is exempt

28. Sec. 10(14) read Highly active field area Up to Rs. 4,200 per month is exempt
with Rule 2BB allowance granted to members
of armed forces (Subject to
certain conditions and
locations)

29. Sec. 10(14) read Island Duty Allowance granted Up to Rs. 3,250 per month is exempt
with Rule 2BB to members of armed forces in
Andaman and Nicobar and
Lakshadweep group of Island
(Subject to certain conditions
and locations)

30. 10(14) City Compensatory Allowance Fully Taxable

31. 10(14) Fixed Medical Allowance Fully Taxable

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 32. 10(14) Tiffin, Lunch, Dinner or Fully Taxable
Refreshment Allowance

33. 10(14) Servant Allowance Fully Taxable

34. 10(14) Project Allowance Fully Taxable

35. 10(14) Overtime Allowance Fully Taxable

36. 10(14) Telephone Allowance Fully Taxable

37. 10(14) Holiday Allowance Fully Taxable

38. 10(14) Any Other Cash Allowance Fully Taxable

B. Perquisites

39. 17(2)(i)/(ii) read Rent free unfurnished License fees determined in accordance
with Rule 3(1) accommodation provided to with rules framed by Government for
Central and State Government allotment of houses shall be deemed to
employees be the taxable value of perquisites.

40. 17(2)(i)/(ii) read Unfurnished rent free Taxable value of perquisites

with Rule 3(1) accommodation provided to i. If house property is owned by the
other employees 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

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 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.

41. 17(2)(i)/(ii) read Rent free furnished Taxable value of perquisites shall be
with Rule 3(1) accommodation computed in following manner:
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

42. 17(2)(i)/(ii) read Accommodation provided in a Taxable value of perquisite shall be

with Rule 3(1) hotel lower of following:
Hotel accommodation will not a) Actual charges paid or payable by
be chargeable to tax if : the employer to such hotel; or
a) It is provided for a total b) 24% of salary
period not exceeding in
aggregate 15 days in the
financial year; and

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 b) Such accommodation in
hotel is provided on employee’s
transfer from one place to
another place.

43. 17(2)(viii) read Motor Car / Other Conveyance Taxable value of perquisites (See
with Rule 3(2) Note 1 below)

43A. 17(2)(iv) Any sum paid by employer in Fully Taxable

respect of any obligation of an
employee

44. 17(2)(viii) read Services of a domestic servant Taxable value of perquisite shall be
with Rule 3(3) including sweeper, gardener, salary paid or payable by the employer
watchmen or personal for such servicesless any amount
attendant (taxable only in case recovered from the employee.
of specified employee [See
Note 4])

45. 17(2)(viii) read Supply of gas, electricity or Taxable value of perquisites:

with Rule 3(4) water for household purposes ➢ Manufacturing cost per unit incurred
by the employer., if provided from
resources owned by the employer;
➢ Amount paid by the employer, if
purchased by the employer from
outside agency
Note:
1. Any amount recovered from the
employee shall be deducted from the
taxable value of perquisite.
2. Taxable in case of specified
employees only [See note 4]

46. 17(2)(viii) read Education Facilities Taxable value of perquisites (See

with Rule 3(5) Note 2 below)

47. 17(2)(viii) read Transport facilities provided by Value at which services are offered by
with Rule 3(6) the employer engaged in the employer to the public less amount
carriage of passenger or goods recovered from the employee shall be a
(except Airlines or Railways) taxable perquisite

48. 17(2)(v) Amount payable by the Fully Taxable

employer to effect an insurance
on life of employee or to effect
a contract for an annuity

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 49. 17(2)(vi) read ESOP/ Sweat Equity Shares Fair Market value of shares or securities
with Rule on the date of exercise of option by the
3(8)/3(9) assessee lessamount recovered from
the employee in respect of such shares
shall be the taxable value of perquisites.
Fair Market Value shall be determined
as follows:
a) In case of listed Shares: Average of
opening and closing price as on date of
exercise of option (Subject to certain
conditions and circumstances)
b) In case of unlisted shares/ security
other than equity shares: Value
determined by a Merchant Banker as on
date of exercise of option or an earlier
date, not being a date which is more
than 180 days earlier than the date of
exercise of the option.

50. 17(2)(vii) Employer’s contribution Taxable in the hands of employee to the

towards superannuation fund extent such contribution exceeds
Rs.1,50,000

51. 17(2)(viii) read Interest free loan or Loan at Interest free loan or loan at
with Rule 3(7)(i) concessional rate of interest concessional rate of interest given by an
employer to the employee (or any
member of his household) is a
perquisite chargeable to tax in the
hands of all employees on following
basis:
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);
2) Find out rate of interest charged by
the SBI as on the first day of relevant
previous year in respect of loan for the
same purpose advanced by it;
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
4) From the total interest calculated for
the entire previous year (step 3), deduct
interest actually recovered, if any, from
employee
5) The balance amount (Step 3-Step 4)
is taxable value of perquisite
Nothing is taxable if:
a) Loan in aggregate does not exceed
Rs. 20,000; or

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 b) Loan is provided for treatment of
specified diseases (Rule 3A) like
neurological diseases, Cancer, AIDS,
Chronic renal failure, Hemophilia
(specified diseases). However,
exemption is not applicable to so much
of the loan as has been reimbursed to
the employee under any medical
insurance scheme.

52. 17(2)(viii) read Facility of travelling, touring and a) Taxable value of perquisite shall be
with Rule 3(7)(ii) accommodation availed of by expenditure incurred by the
the employee or any member of employer less amount recovered from
his household for any holiday employee.
b) Where such facility is maintained by
the employer, and is not available
uniformly to all employees, the value of
benefit shall be taken to be the value at
which such facilities are offered by other
agencies to the public.

53. 17(2)(viii) read Free food and beverages 1) Fully Taxable: Free meals in excess
with Rule 3(7)(iii) provided to the employee of Rs. 50 per meal less amount paid by
the employee shall be a taxable
perquisite
2) Exempt from tax: Following free
meals shall be exempt from tax:
a) Food and non-alcoholic beverages
provided during working hours in
remote area or in an offshore
installation;
b) Tea, Coffee or Non-Alcoholic
beverages and Snacks during working
hours are tax free perquisites;
c) Food in office premises or through
non-transferable paid vouchers usable
only at eating joints provided by an
employer is not taxable, if cost to the
employer is Rs. 50(or less) per meal.

54. 17(2)(viii) read Gift or Voucher or Coupon on a) Gifts in cash or convertible into
with Rule 3(7)(iv) ceremonial occasions or money (like gift cheque) are fully taxable
otherwise provided to the b) Gift in kind up to Rs.5,000 in
employee aggregate per annum would be exempt,
beyond which it would be taxable.

55. 17(2)(viii) read Credit Card a) Expenditure incurred by the

with Rule 3(7)(v) employer in respect of credit card used
by the employee or any member of his
household less amount recovered from
the employee is a taxable perquisite

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 b) Expenses incurred for official
purposes shall not be a taxable
perquisite provided complete details in
respect of such expenditure are
maintained by the employer

56. 17(2)(viii) read Free Recreation/ Club Facilities a) Expenditure incurred by the
with Rule 3(7)(vi) employer towards annual or periodical
fee etc. (excluding initial fee to acquire
corporate membership) less amount
recovered from the employee is a
taxable perquisite
b) Expenses incurred on club facilities
for the official purposes are exempt from
tax.
c) Use of health club, sports and
similar facilities provided uniformly to all
employees shall be exempt from tax.

57. 17(2)(viii) read Use of movable assets of the Taxable value of perquisites
with Rule employer by the employee is a a) Use of Laptops and Computers: Nil
3(7)(vii) taxable perquisite b) Movable asset other than Laptops,
computers and Motor Car*: 10% of
original cost of the asset (if asset is
owned by the employer) or actual higher
charges incurred by the employer (if
asset is taken on rent) less amount
recovered from employee.
*See Note 1 for computation of
perquisite value in case of use of the
Motor Car

58. 17(2)(viii) read Transfer of movable assets by Taxable value of perquisites

with Rule an employer to its employee a) Computers, Laptop and Electronics
3(7)(viii) items: Actual cost of
asset less depreciation at 50% (using
reducing balance method) for each
completed year of usage by
employer lessamount recovered from
the employee
b) Motor Car: Actual cost of
asset less depreciation at 20% (using
reducing balance method) for each
completed year of usage by
employer less amount recovered from
the employee
c) Other movable assets: Actual cost of
asset less depreciation at 10% (on SLM
basis) for each completed year of usage
by employer less amount recovered
from the employee.

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 59. 17(2)(viii) read Any other benefit or amenity Taxable value of perquisite shall be
with Rule 3(7)(ix) extended by employer to computed on the basis of cost to the
employee employer (under an arm’s length
transaction) less amount recovered
from the employee.
However, expenses on telephones
including a mobile phone incurred by
the employer on behalf of employee
shall not be treated as taxable
perquisite.

62. Proviso to Medical facilities in India a) Expense incurred or reimbursed by

section 17(2) the employer for the medical treatment
of the employee or his family (spouse
and children, dependent – parents,
brothers and sisters) in any of the
following 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.

63. Proviso to Medical facilities outside India Any expenditure incurred or reimbursed
section 17(2) by the 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.

C. Deduction from salary

1. 16(ia) Standard Deduction Rs. 40,000 or the amount of salary,

whichever is lower (Any salaried
person)

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 2. 16 (ii) Entertainment Allowance Least of the following is exempt from
received by the Government tax:
employees (Fully taxable in a) Rs 5,000
case of other employees) b) 1/5th of salary (excluding any
allowance, benefits or other perquisite)
c) Actual entertainment allowance
received

3. 16(iii) Employment Tax/Professional Amount actually paid during the year.

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.

D. Retirement Benefits

Leave Encashment

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

earned leave at the time of from tax:
retirement of other employees a) Amount actually received
(not being a Government b) Unutilized earned leave* X Average
employee) monthly salary
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

Retrenchment Compensation

3. 10(10B) Retrenchment Compensation Least of the following shall be exempt

received by a workman under from tax:
the Industrial Dispute Act, 1947 a) Amount calculated as per section
(Subject to certain conditions). 25F(b)of the Industrial Disputes Act,
1947;
b) Rs. 5,00,000; or
c) Amount actually received

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 Note:
i. Relief under Section 89(1) is available
ii. 15 days average pay for each
completed year of continuous service or
any part thereof in excess of 6 months
is to be adopted under section 25F(b) of
the Industrial Disputes Act,1947

Gratuity

4. 10(10)(i) Gratuity received by Fully Exempt

Government Employees (Other
than employees of statutory
corporations)

5. 10(10)(ii) Death -cum-Retirement Least of following amount is exempt

Gratuity received by other from tax:
employees who are covered 1. (*15/26) X Last drawn salary** X
under Gratuity Act, 1972 (other completed year of service or part
than Government employee) thereof in excess of 6 months.
(Subject to certain conditions). 2. Rs. 20,00,000
3. Gratuity actually received.
*7 days in case of employee of seasonal
establishment.
** Salary = Last drawn salary including
DA but excluding any bonus,
commission, HRA, overtime and any
other allowance, benefits or perquisite

6. 10(10)(iii) Death -cum-Retirement Least of following amount is exempt

Gratuity received by other from tax:
employees who are not 1. Half month’s Average Salary* X
covered under Gratuity Act, Completed years of service
1972 (other than Government 2. Rs. 10,00,000
employee) (Subject to certain 3. Gratuity actually received.
conditions). *Average salary = Average Salary of
last 10 months immediately preceding
the month of retirement
** Salary = Basic Pay + DA (to the
extent it forms part of retirement
benefits)+ turnover based commission

Pension

7. – Pension received from United Fully Exempt

Nation Organization by the
employee of his family
members

8. 10(10A)(i) Commuted Pension received Fully Exempt

by an employee of Central
Government, State

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 Government, Local Authority
Employees and Statutory
Corporation

9. 10(10A)(ii) Commuted Pension received 1/3 of full value of commuted pension

by other employees who also will be exempt from tax
receive gratuity

10. 10(10A)(iii) Commuted Pension received 1/2 of full value of commuted pension
by other employees who do not will be exempt from tax
receive any gratuity

11. 10(19) Family Pension received by the Fully Exempt

family members of Armed
Forces

12. 57(iia) Family pension received by 33.33% of Family Pension subject to

family members in any other maximum of Rs. 15,000 shall be exempt
case from tax

Voluntary Retirement

13. 10(10C) Amount received on Voluntary Least of the following is exempt from
Retirement or Voluntary tax:
Separation (Subject to certain 1) Actual amount received as per the
conditions) guidelines i.e. least of the following
a) 3 months salary for each completed
year of services
b) Salary at the time of retirement X No.
of months of services left for retirement;
or
2) Rs. 5,00,000

Provident Fund

14. – Employee’s Provident Fund For taxability of contribution made to

various employee’s provident fund and
interest arising thereon see Note 3.

National Pension System (NPS)

15. 10(12A)/10(12B) National Pension System Any payment from the National Pension
System Trust to an assessee on closure
of his account or on his opting out of the
pension scheme referred to in section
80CCD, to the extent it does not exceed
40% of the total amount payable to him
at the time of such closure or his opting
out of the scheme.
Note: Partial withdrawal from NPS shall
be exempt to the extent of 25% of

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 amount of contributions made by the
employee.

E. Arrear of Salary and relief under section 89(1)

1. 15 Arrear of salary and advance Taxable in the year of receipt. However

salary relief under section 89 is available

2. 89 Relief under Section 89 If an individual receives any portion of

his salary in arrears or in advance or
receives profits in lieu of salary, he can
claim relief as per provisions of section
89 read with rule 21A

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 Judicial Analysis (Case Laws)
Salary income earned outside India
Background
The Income-tax Act, 1961 (the Act) allows1 for adopting the provisions of the Act or of the tax treaty
whichever is beneficial to the taxpayer. Recently, the Delhi Bench of the Income-tax Appellate Tribunal
(the Tribunal) in the case of Raman Chopra2 (the taxpayer) held that salary income outside India earned by
an individual who qualified as a resident of the other country is eligible for tax exemption in India under
the relevant tax treaty based on a split residency position.
Facts of the case

 The taxpayer was rendering services in the USA for the period 1 April 2010 to 30 June 2010, during
which time he qualified as a tax resident of the USA.
 In his return of income, the taxpayer had claimed the salary income earned in the USA as exempt from
tax under Article 16(1) of the India-USA tax treaty (tax treaty). The taxpayer had relied on the Organisation
for Economic Co-operation and Development (OECD) commentary in claiming such exemption.
 Upon scrutiny, the Assessing Officer (AO) denied the exemption on the basis of stay in India for a period
more than 183 days in the relevant financial year (FY).
 On disallowing the exemption claimed by the taxpayer, the AO levied a penalty3 for concealment of
income/furnishing inaccurate particulars of income without providing the taxpayer with an opportunity of
being heard.
 The taxpayer preferred an appeal before the Commissioner of Income-tax (Appeals) [CIT(A)]. The
CIT(A) upheld the AO’s order and dismissed the taxpayer’s appeal to delete the penalty imposed by the
AO.
 Aggrieved by the order of the CIT(A), the taxpayer appealed before the Tribunal for grant of exemption
under the tax treaty and deletion of the penalty imposed by the AO on the ground that he had fully disclosed
all information asked for and had not furnished inaccurate particulars. The taxpayer had relied upon the
decision in the case of Reliance Petro Products4 .

Tribunal’s ruling
 The Tribunal observed that the taxpayer had qualified as a resident and ordinary resident in India for the
FY 2010-11 and also as a tax resident of the USA during the period 1 April to 30 June 2010. As he qualified
as a resident of both countries, his residential status needs to be determined under Article 4(2) of the tax
treaty. Based on the tie-breaker analysis, the taxpayer qualified as a tax resident of the USA as per the tax
treaty for the said period of 1 April to 30 June 2010. As a resident of the USA, the taxpayer was entitled to
claim exemption from tax in India in respect of salary earned in the USA for such period as per Article
16(1) of the tax treaty. Hence, the Tribunal allowed the appeal of the taxpayer for grant of exemption from
tax under the tax treaty.

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 The Tribunal also noted that the taxpayer had fully cooperated during the assessment proceedings and
provided all the details relating to the exemption claimed. The penalty under Section 271(1)(c) of the Act
is for furnishing inaccurate particulars of income and concealment of income and mens rea was an essential
requirement for imposition of penalty. Otherwise, as observed by the Supreme Court of India in the case of
Dilip Shroff5 , every return of income where the claim of the taxpayer is not accepted by the AO, the
taxpayer will invite penalty under Section 271(1)(c) of the Act.
 Following the rationale of the decision in the case of Reliance Petro Products and also placing reliance in
the decision of the Supreme Court of India in the case of Hindustan Steel6 , the ITAT deleted the penalty
as the imposition of penalty not being justified in the present case.

comments
Tax exemption of income under the tax treaty in this case has been granted purely on the facts of the case
and in doing so, the decision endorses the position of split residency which is neither specifically permitted
nor prohibited by the Act or the tax treaties. The decision also clarifies on what would qualify as
concealment of income/furnishing inaccurate particulars of income giving rise to the levy of penalty under
Section 271(1)(c) of the Act. Though the decision has been in favour of the taxpayer and serves as guidance
in case of an individual resident in two jurisdictions, adoption of the position of split residency and
consequent claim of exemption under the tax treaty needs to be made based on the facts of each case. Treaty
claims, especially at lower levels, are often litigious.

Tax on perquisite:
Tax borne by employer on perqusite of Employees would constitute Non Monetary Benefits and
as such same is exempted u/s 10 (10CC). Refer, Tranocean Discover LLC v ACIT, 6 taxmann.com
18 - Delhi – ITAT. Same had also confirmed in the case of Mitsubishi Corporation v CIT, 200
Taxman 372 and Isaco Sakai v. Jt. CIT, 49 SOT 154 (Delhi)(Trib.).
In an appeal before the High Court the revenue raised the question whether the tax paid by the
employer (Japan Airlines International Company Ltd ) is a “Perquisite” within the meaning of
section 17(2) and, therefore, in terms of rule 3 of the Income Tax Rules 1962, cannot be taken in
to consideration for computing the value of the perquisite “rent free accommodation”. While
dismissing the appeal of revenue the court held that payment of income tax by the employer is
payment of employee who has taxable income as an assessee is liable to pay tax. His income is
chargeable to tax. It is the obligation of the employee as an assessee to pay tax . Its this obligation
which is being discharged and paid by the employer. Therefore, it would fall within the ambit of
section 17(2) (iv). Thus the tax component paid by the employer towards and as income tax , when
an employee is entitled to tax free salary, is a perquisite within the meaning of section 17 (2) and
the monetary value of such tax free salary , that is tax component could not be included in
computing the perquisite value of rent free accommodation provided by the employer to the
employees. Refer, CIT v. Telsuo Mitera, 345 ITR 256

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 Conclusion

The Taxation of income received from salaries is not just a concept to learn only but practically it
puts a lot of challenges in front of tax return preparers so as to ensure that correct provisions are
applied while computing the net salary income. Income from salary seems to be a very small
portion but it contains lot of provisions, the study of which is must before practically applying it.
The Government has tried to achieve the objective of social welfare by providing various
incentives for education, health, housing, savings, pension schemes, donations, senior citizens and
women assessees, and 260 generating employment etc. These incentives are appreciable as these
are related with the basic necessities of a common man. However, in case of some incentives the
monetary ceiling seems to be illogical or very low as it has not been revised since a long time e.g.
medical expenses, interest on self occupied housing loan, saving schemes. Certain Rationalization
and Simplification Measures have been taken during the study period such as lowering income tax
rates in case of all the assessees, introducing standard deduction at the rate of 30 per cent of net
annual value in case of let out house property, providing depreciation on intangible assets .

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 BIBLIOGRAPHY

https://www.caclubindia.com/articles/understanding-taxation-of-salary-with-latest-
case-laws-17160.asp
https://www.scribd.com/doc/15256281/Income-From-Salary
https://taxguru.in/income-tax/tax-treatment-income-salary.html
https://www.indiafilings.com/learn/salary-income-under-income-tax/
https://www.caclubindia.com/articles/income-from-salary-23975.asp
https://home.kpmg/content/dam/kpmg/pdf/2016/06/tnf-india4-june-16-2016.pdf

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