COMPUTATION OF INCOME UNDER THE HEAD

“SALARIES”.

WHAT IS “SALARY”?

Relationship between payer and payee-

The relationship between payer and payee should be

of an employer and employee, or master or servant.

Only then the amount received will be treated as

salary.

Employer may be:

 An individual, firm,
 Association of persons,
 Company, and corporation,
 Central Government,
 State Government,
 Public body or a local authority.

Employer may be operating in India or abroad. The

employee may be full time or part time.

The important point is that payment received by

an individual from a person other than his
employer cannot be termed as salary and

Consequently such income is not chargeable to tax

under the head “Salaries”.

1
Salaries and wages not conceptually different.

SALARIES UNDER SEC 17(1)

Under Sec17 (1) salary is defined to include the

following:

(a) Wages;

(b) Any annuity or pension;

(c) Any gratuity;

(d) Or in addition to any salary or wages;

(e) Any advance of salary;

(f) Any payment received by an employee in

respect of any period of leave not availed by him,

(g) The portion of the annual accretion in any

previous year to the balance at the credit of an
employee participating in a recognized provident
fund to the extent it is taxable.

(h) Transferred balance in the recognized provident

fund to the extent it is taxable.

2
  Salary is taxable on “due” or “receipt” basis
which ever is earlier.

This is regardless of fact whether the books of

accounts are maintained by the employer on:

Mercantile basis or

Cash basis.

 Leave salary is taxable during continuity of

employment.

However as a general rule leave encashment at

The time of retirement is exempt from tax.

 Salary in lieu of notice period is taxable on

receipt basis.

 Salary to a partner is appropriation of profits.

It is therefore not chargeable under the head

“salaries” but chargeable under the head “profit
and gains of business and profession”.

 Fees and commission are taxable as salary

irrespective of facts that they are paid in
addition to or in lieu of salary.

 Bonus is taxable in the year of receipt.

3
 GRATUITY IS TAXABLE AS PER THE
FOLLOWING PROVISIONS:

Status of employee Whether gratuity is taxable

Government employee It is fully exempt from tax

under sec 10(10)(i)

Non- Government employees It is fully or partly exempt

covered by payment of from tax under sec 10(10)(ii)
gratuity act

Non- Government employees It is fully or partly exempt

under sec 10(10)(iii)

1. In the case of Government employees,

(Employees of Central, State Government, local authority

but not employees of statutory corporations)

Any death cum retirement gratuity is wholly exempt from

Tax under sec10 (10) (i)

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2. In the case of employees covered by “payment of
gratuity act, 1972”, the exemption from tax is on the
following basis.

1. 15 days salary (7days salary in the case of

employees of seasonal establishment) based
on salary last drawn for every completed year
of service or part thereof in excess of 6
months.

2. Rs. 3,50,000.

3. Gratuity actually received.

Least of the above is exempt from tax.

Salary for the above purpose means:

salary last drawn and includes

dearness allowance but does not include

any bonus, commission, house rent allowance,

overtime wages and any other allowance.

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How to determine 15 days salary:

For this purpose a month is considered to contain 26

Working days.

One-day salary is calculated by dividing salary last drawn

by 26.

One day salary as calculated above is multiplied by 15.

For example:
If salary last drawn is Rs 2500. p.m.,

15 days salary would be Rs.1442.31 [250015/26]

3. In the case of any other employee the gratuity is

Exempt on the following basis:

1. Rs.3, 50,000

2. Half month’s average salary for each

completed year of service.

3. Gratuity actually received.

Least of the above three is exempt from tax

6
Completed year of service: While calculating completed
year of service any fraction of the year is ignored.

Average monthly salary- How to determine:

Average monthly salary is calculated on the basis of

average salary for the ten months immediately preceding
the month in which the employee has retired.

PENSION (SEC.17 (1)(II)):

Pension is periodical payment received by an employee

after his retirement and is taxed as salary.

The pension received from United Nations is not taxable.

The basis of charge of pensions as follows:

Pension Status of employee Is it chargeable to tax

Uncommuted Government/ non

pension Government employee It is chargeable to tax

Commuted Government employee It is fully exempt from

pension tax under sec10 (10A)
(i)
Commuted Non-Government It is fully or partly
pension employee Exempt

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 from tax under sec
10(10A)(ii)
What is uncommuted pension:

It is pension received by an employee.

If Mr. A receives Rs 5000 as monthly pension, it is taxable in the

hands of Government and non- Government employee

What is commuted pension:

There is provision to pay some lump sum payment in lieu of

periodical payments of pension.

It is a pension paid in advance and has the effect of reducing

your monthly pension.

Some portion of the periodical payments is paid as lump sum

payment.

Such lump sum payment is commuted pension.

For example:

Mr. X’s pension was fixed as Rs. 2000 pm.

As per service rules he got 25% of his pension commuted

for Rs 60,000 as lump sum and his monthly pension was reduced
to Rs. 1500 i.e, 75% of uncommuted pension.

In this case Rs 60,000 is the commuted pension.

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Commuted pension is taxable as under:

Status of employee Gratuity received / Exemption in

not received respect of
commutation of
pension under Sec
10(10A)

Government
employee (i.e., an
employee of central Gratuity may or may Entire commuted
or state government, not be received pension is exempt
local authority and from tax
statutory corporation

Non- Government Gratuity is received One-third of pension

employee which he is normally
entitled to receive is
exempt from tax

Non-Government Gratuity is not One- half of pension,

employee received which he is normally
entitled to receive, is
exempt from tax.

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Any amount received in excess of above is taxable
.

RETRENCHMENT COMPENSATION [SEC 10(10B)]

Compensation received by a workman at the time of

Retrenchment is exempt from tax to the extent of lower of
following:

1. An amount calculated in accordance with provisions of Sec

25F (b) of the Industrial Dispute Act, 1947 (I.D Act);or

2. Such amount as notified by the Government

(i.e., Rs. 5 lacs); or

3. The amount received

Under the Industrial Dispute Act, 1947 a workman is entitled to

retrenchment compensation equal to 15 days average pay, for
every completed year of service or any part thereof in excess of
six months service.

Compensation in excess of above limits is taxable as

salary.

However the aforesaid limit is not applicable in cases where the

compensation is paid under the scheme approved by the
Government.

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PROFITS IN LIEU OF SALARY [SEC 17(3)]

It includes the following:

1. The amount of any compensation due or received by an

assessee from his employer or former employer in
Connection with termination of his employment.

2. The amount of any compensation due or received by an

assessee from his employer or former employer in

connection with the modification of the terms of and

conditions of employment.

3. Any payment due or received by an assessee from his

employer or former employer except the following:

 Gratuity (exempt),
 House Rent Allowance (exempt),
 Commuted Pension (exempt),
 Retrenchment Compensation (exempt),
 Payment from approved Superannuating fund,
 Payment from statutory Provident Fund or
 Public Provident Fund,
 Payment from recognized provident fund (exempt).

4. Any payment from unrecognized provident fund or such

other fund to the extent to which it does not consist of
contribution by the assesses or interest on such contributions.
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 5. Any sum received under a Keyman insurance policy
including the sum allocated by way of bonus on such policy.
6. Any amount received (in lump sum or otherwise) prior to
employment or after cessation of employment

Voluntary payment to employee

Voluntary payments made by an employer to his employee is

taxable in the hands of recipient as salary if such payment is made
in reference to services rendered by virtue of employment.

Salary received from United Nations: Exempted.

COMPENSATION RECEIVED AT THE TIME OF

VOLUNTARY RETIREMENT [SEC 10(10C)]

It is exempt if following conditions are satisfied.

1. Compensation is received at the time of voluntary retirement

Or separation.

2. Compensation is received by an employee of the following

Undertakings:

1. An authority established under a central or

state Act;

2. Local authority

3. University

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 4. IIT

5. The State Government

6. The Central Government

7. A notified institute having importance

throughout India or any State.

8. Notified Institute of Management like IIMs

9. Public sector undertaking

3. Compensation is received in accordance with the

scheme of voluntary retirement / separation which is
framed in accordance with the prescribed guidelines.

4. Maximum amount of exemption is Rs. 5 lacs.

5. Where exemption is allowed to an employee under the

sec10 (10C) in any assessment year, no exemption shall
be allowed in any other assessment year.

DIFFERENT FORM OF ALLOWANCES-HOW TAXED?

Allowance is generally defined as a fixed quantity of money

or other substance given regularly in addition to salary for

the purpose of meeting some particular requirement

13
connected with the service rendered by the employee or as

a compensation for unusual conditions of that service.

It is fixed and predetermined and is irrespective of actual

expenditure.

Under the Act it is taxable under Sec15 on “due” or “receipt”

basis irrespective of fact that it is paid in addition to or in lieu of
salary

Tax treatment of different allowances are as follows:

City compensatory allowance- it is always taxable.

House rent allowance (HRA) [Sec10 (13A)] :

The least of the following is exempt:

1. Actual house rent allowance received by the

employee in respect of period during which
rental accommodation is occupied by the
employee during the previous year

2 Rent paid in excess of 10% of salary.

3 An amount equal to 50% of salary,

where residential accommodation is situated at

Mumbai, Kolkata, Delhi or Chennai
14
 and

an amount equal to 40% of salary in other

places.
For this purpose salary means:

 Basic salary and

 Includes dearness allowance if terms of
employment so provide (where it is taken into
account while calculating PF & other retirement
benefits).

It also includes commission based on fixed percentage of

turnover achieved by an employee as per terms of contract
of employment.

But does not include any other allowance and perquisite.

When exemption is not available:

Exemption is not available if:
 An employee is living in his own house or

 In a house for which he does not pay any rent or pays

rent, which does not exceed 10% of salary.

Problem 1:
Mr. X, who resides in Chennai gets Rs. 3,00,000
per annum as basic salary during the assessment
year 2004-05.

He receives Rs. 50,000 per annum as house rent

allowance.
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 Rent paid by him is Rs. 40,000.
Find out the amount of taxable house rent
allowance for the assessment year 2004-05.
Solution:

1. HRA received Rs. 50,000

2. Excess of rent paid over 10% of salary Rs. 10,000
3. 50 % of salary Rs. 1,50,000

Least of the above is exempt Rs. 10,000

Taxable House Rent Allowance: Rs 50,000- Rs 10,000

= Rs40, 000.

Problem2:

Mr. A who is posted in Delhi but resides in NOIDA,

gets

Rs 60,000 per annum as basic salary during the

previous year 2003-04.

He gets Rs 9000 per annum as house rent allowance,

though he pays Rs.12, 000 per annum as rent.

During the previous year 2003-04, he receives

Rs. 5,000 as advance salary of April 2004.

Can he claim entire amount of House Rent Allowance

as exempt from tax for the assessment year 2004-05?

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Solution:
1.Actual HRA received Rs.9000
2.Excess of rent paid over 10% of salary Rs.6000
3.40% of salary Rs.24, 000.

Least of above three is exempt Rs.6000.

The balance of Rs 3000 is chargeable to tax for the assessment

year 2004-05.

Salary for a period other than the relevant previous year is not
taken into account while computing the exempt portion of house
rent allowance.

Therefore the advance salary of Rs. 5,000 of April 2004 is

ignored.

Problem3:
Mr. X a resident of Ajmer receives Rs. 1, 92,000 per annum as
basic salary during the previous year 2003-04.

In addition he gets Rs.19,200 per annum as dearness allowance

forming part of basic salary.

He is entitled to 7% commission on sales made by him (sale made

by him during the relevant previous year is Rs 86,000).

He receives Rs 24,000 per annum as house rent allowance.

17
He pays Rs 21,500 per annum as house rent.

Determine the quantum of house rent allowance exempt from tax.

Solution:

Salary for this purpose is as follows:

Basic salary: Rs.1,92,000

Dearness allowance forming part of salary: Rs 19,200

Commission @ 7% on Rs.86,000 Rs. 6,020

Total Rs 2,17,220

1.HRA received Rs.24, 000

2.40% of salary Rs.86, 888

3.Rent paid in excess of 10% of salary Nil

HRA exempt – least of the above three Nil

Entire amount of HRA of Rs 24,000 is chargeable to tax.

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Problem 4:

X who resides in Pune.

He receives Rs.42, 000 per annum as basic pay during the

previous year 2003-04.

He stays in his father’s house up to October 31,2003 for which he

does not pay any rent and thereafter

He takes an accommodation on monthly rent of Rs. 2,000.

The employer however pays Rs.250 per month as house rent

allowance throughout the previous year.

As the sum of house rent allowance exempted (as per his

calculation) is the least of the three sums

(a) Rs.16,800 i.e., 40% of salary,

(b) Rs. 3000 i.e., house rent allowance and

(c) Rs. 5800 excess of rent paid over 10% of salary.

He claims that entire house rent allowance is exempt.

Is he legally correct?

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Solution:

The mode of computation is not correct.

As the salary for the period during which rented

accommodation is not occupied by him is not to be
taken into account.

The calculation should be as follows:

(a) Rs 1400 per month being 40% of salary of Rs 3500 p.m

(b) Rs. 250 p.m (the amount of house rent allowance)

( c) Rs.1650 per month (being the excess of rent paid over

10% of salary, i.e., Rs.2000 –10% of Rs. 3500).

As the least of above three is Rs.250 p.m.

The amount exempt from tax is Rs 1250 [Rs. 250 p.m for 5
months during which rented accommodation was occupied by X].

The amount of house rent chargeable to tax is as follows:

House rent allowance received (Rs. 250 12) = Rs 3000

Less: amount exempt from tax = Rs1250

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Amount to be included in salary income = Rs1750

Entertainment allowance [Sec16 (ii)]

Entertainment allowance is first included in income under the head

“salaries” and thereafter a deduction is given as follows.

In the case of Government employee (Central or State

Government): The least of following is deductible:

(a) Rs. 5,000

(b) 20% of basic salary; or

( c) Amount of entertainment allowance granted during the

previous year.

The following points need consideration:

1. For this purpose salary excludes any allowance, benefit

or other perquisites.

2. Amount actually expended towards entertainment (out

of entertainment allowance received ) is not to be taken
into consideration.

In the case of non- Government employee (including

employees of statutory corporation and local authority)
entertainment allowance is not deductible.
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SPACIAL ALLOWANCES PRESCRIBED AS EXEMPT
UNDER SEC 10(14)

The provisions of sec 11(14) are given below:

When exemption depends on actual expenditure by the

employee:

The following allowances are exempt to the extent of

amount utilized for specified purpose for which the
allowance is received.

In other words, in the cases given below the amount of

exemption under sec 10(14) is -

(a) The amount of allowance: or

(b) The amount utilized for the specific purpose for which
allowance is given

which ever is lower.

 Travelling allowance/ transfer allowance.

 Conveyance allowance granted for the

performance of duty.

The journey from residence to office and back is not

treated as expenditure in performance of duties.
22
  Daily allowance
 Helper allowance for meeting the performance of
official duties.

 Research allowance

 Uniform allowance

When exemption does not depend upon expenditure

In the cases given below the amount of exemption does not

depend on expenditure incurred by the employee but the
ceiling has been prescribed in the Act in rule 2BB:

 Special area allowance (Hill Area Allowance)

Exemption as per rule 2BB, Varies from Rs. 300 p.m

to Rs. 7,000 p.m.

 Border area allowance

The exemption varies from Rs. 200 p.m to Rs.1300

p.m

 Transport allowance

The exemption is Rs. 800 p.m

 Children education allowance

23
 The amount exempt is limited to Rs.100 per month
per child upto a maximum of two children.
 Etc.

Allowance to Government employees outside India [Sec

10(7)] – Wholly exempt.

Tiffin allowance is taxable.

Fixed medical allowance is taxable.

Servant allowance is taxable.

Allowance to High Court and Supreme Court Judges is

exempt.

PERQUISITES

Perquisites are any casual emoluments or benefits attached to an

office or position in addition to regular salary or wages.

Perquisite may be in cash or in kind.

“Perquisites”- Whether taxable- In order to decide whether

perquisites are chargeable to tax, all perquisites are divided in the
following three categories:

Category A: These perquisites are taxable in all cases.

 Rent free accommodation.

 Accommodation at concessional rate.

24
 Employee’s obligation met by employer.
 Amount payable by employer to affect an
assurance on the life of employee.

 Notified fringe benefit (excluding fringe benefits

subject to fringe benefit tax) such as household
servants, interest free or concessional loans etc.

Category B: Perquisites not taxable:

Rent free house

 Rent free official residence provided to a Judge of

a High Court or of the Supreme Court.

 Rent-free furnished residence (including

maintenance thereof) provided to an official of
Parliament, a Union Minister or a Leader of
Opposition in Parliament.

 Accommodation provided in a remote area to an

employee working at a mining site or an onshore oil
exploration etc.

 Accommodation provided on transfer of an

employee in a hotel for not exceeding 15 days in
aggregate.

CAR

25
  Provision of car or any other conveyance for
personal use by the employee w.e.f.1.4.2005
Reimbursement of expenses in respect of car is
treated as ‘nil’ in the hands of employee w.e.f
AY 2006-07

It has been included in fringe benefits tax charged on

employer.

Earlier provisions have been modified.

Education facility

 Free education facility provided in an institute

owned /maintained by employer to children of
employee provided cost value does not exceed Rs
1000 p.m per child (no limit on children).

 Amount spent on training of employees or fees

paid for refresher management course.

Transport facility

 From A.Y 2006-07 there is no tax on employees in

respect of transport facility provided by employer,
as it is included under fringe benefit tax.

Interest free loan

 Interest free concessional loan of an amount not

exceeding Rs.20, 000.

26
 Interest free loan for medical treatment of the
nature given in rule 3A.

Free meals

 From A.Y 2006-07 the value of free meals shall be

‘nil’ in the hands of the employee.

However the employer has to pay fringe benefit tax

on this.

Club

 From A.Y 2006-07 the value of perquisites is ‘nil’,

since the same is chargeable to fringe benefits tax.

Use of moveable asset

 Computer /laptop given (not transferred) to an

employee for official/personal use (which is owned
or hired by employer.

The perquisite value is ‘nil’

Medical facility

 Reimbursement of expenditure incurred on medical

treatment of an employee or his family member in a
hospital (other than hospital owned/maintained by
employer or a Government approved hospital) upto
an amount not exceeding Rs 15,000.

27
 Others

In the following cases the value is ‘nil’ w.e.f A.Y

2006-07, as the employer has to pay fringe benefit
tax.

 Gift.
 Credit card facility.
 Telephone/ mobile charges.
 Traveling stay on a holiday, Etc.

Category C- Perquisites taxable only in the hands of

specified employees [Sec 17(2)(iii)]

Perquisites which are neither covered by ‘A’ category nor by

category ‘B’ are taxable only in the hands of specified employees:

Who is a specified employee-The following are specified

employees:

 A director employee
 An employee who has substantial interest in the
employer company.

A person has substantial interest in the employer

company if he is a beneficial owner of equity
shares carrying 20% or more voting power in the
employer company.

 Employee drawing in excess of Rs 50,000.

28
 For calculating Rs.50, 000, the following are
excluded/ deducted.

(a) all non- monetary benefits;

(b) monetary benefits which are not taxable under
sec 10[for example house rent allowance to
the extent exempt under sec 10(13A) is
excluded]
(c) Standard deduction, deduction on account of
entertainment allowance and professional tax.

Where salary is received from more than one

employer during the relevant previous year, the
aggregate salary from these employers will have to
be taken into account for the purpose of
determining the aforesaid ceiling.

Example:

1. X is employed by A Ltd.

He is director in the company from June 30, 2003 to

Oct 3, 2003.

For the previous year 2003-04; he is a “specified

employee” of A Ltd.

2. Y is employed by B Ltd.

He holds 20% share equity share capital of B Ltd.

29
 He is a “specified employee” of B Ltd.

4. Z is employed by C Ltd.

He gets a salary of Rs.90, 000 (i.e., basic salary: Rs

60,000, bonus: Rs 30, 000).

A has income under the head “Salaries” (exclusive of

monetary benefits) exceeds Rs.50, 000, he is a specified
employee.

VALUATION OF RENT FREE UNFURNISHED

ACCOMMODATION

Accommodation has been defined to include a house, flat,

farm house or part thereof or accommodation in a hotel,
motel, service apartment, guest house, caravan, mobile
home, ship or other floating structure.

For the purpose of valuation of perquisite in respect of

unfurnished accommodation, employees are divided into
two categories:

(a) Central and Sate Government employees.

(b) Private sector employees or other employees.

30
 (a) Value of unfurnished accommodation provided
to:

 Central Government Employees,

 State Government employees including those who

are on deputation to Government undertakings.

The value is the License fee fixed in respect of the

Accommodation in accordance to Government rules.

Employees of local authority or a foreign government are

however not covered by this category.

31
B. Value of unfurnished accommodation provided to
other employees.

Population of city as Where the Where the

per 2001 census accommodation is accommodation is
where owned by the taken on lease or rent
accommodation is employer by the employer
provided

Exceeding 25 lacs 15% of salary Amount of lease rent

paid or payable or
15% of salary which
ever is lower

Exceeding 10 lacs
but not exceeding 10% of salary Same as above
25 lacs

Any other 7.5% of salary Same as above

32
Salary for this purpose- How to calculate.

Salary includes the following:

(a) Basic salary

(b) Dearness allowance/pay, if terms of employment so
provide.
(c) Bonus
(d) Commission
(e) Fees
(f) All other taxable allowances (excluding the amount not
taxable)
(g) Any monetary payment, which is chargeable to tax (by
whatever name called).

For this purpose salary does not include the

following:

(i) Dearness allowance /pay, if not taken into account while

calculating retirement benefits like provident fund, gratuity etc.

(ii) Employer’s contribution to provident fund account of the

employee.

(iii) All allowances which are exempt from tax.

(iv)Value of perquisites.

For the purpose of this salary is determined on

accrual basis.

33
VALUATION OF RENT-FREE FURNISHED
ACCOMMODATION

The value of furnished accommodation shall be equal to:

1. Value of accommodation, computed as if it were

unfurnished plus;

2. 10% per annum of the original cost of furniture if

furniture is owned by the employer

or actual hire charges paid or payable if furniture is

hired from the third party.

Furniture includes television sets; radio sets

refrigerators, other household appliances, air
conditioning plant or equipment or other similar
appliances or gadgets.

VALUATION OF ACCOMMODATION PROVIDED IN A

HOTEL.

Hotel includes licensed accommodation in the nature of

motel, service apartment or guesthouse.

In case an employee is provided with an accommodation

in a hotel the perquisite value shall be calculated-

At the rate of 24 % of salary (paid or payable) or actual

charges (paid or payable) to such hotel, whichever is
lower, for the period during which the accommodation is
provided in a hotel.

34
 If the following two conditions are satisfied nothing is
chargeable to tax:

1.The hotel accommodation is provided for a total period

not exceeding 15 days in a previous year; and

2. Such an accommodation is provided on an employee’s

transfer from one place to another place.

VALUATION OF ACCOMMODATION IN “REMOTE

AREAS”

The above valuation rule shall not apply to any accommodation

provided to an employee working at a mining site or an on-shore
oil exploration site or a project execution site or an offshore site
which is-

(a) Temporary and having a plinth area upto 800sq.ft and

which is located not less than8 k.m away from the local
limits of any municipality or a cantonment board; or

(b) Is located in a remote area (an area located at least 40 k.m

away from a town having a population upto 20,000)

The value of such accommodation is ‘nil’.

35
VALUATION OF DUAL ACCOMMODATION IN CASE OF
TRANSFER

Where on account of transfer from one place to another, the

employee is provided with an accommodation at new place of
posting while retaining the accommodation at other place, the
value of perquisite shall be as under:

(i)For a period of 90 days- Value of only one accommodation

having lower value (as per valuation rules) shall be taxable.

(ii) For a period after 90 days – Value of both accommodations

determined as per valuation rules shall be taxable.

VALUATION OF ACCOMMODATION PROVIDED AT

CONCESSIONAL RENT

In the case of an accommodation provided at a concessional

rent, the valuation will be made as if:

(i)The employee has been provided rent-free accommodation as

calculated above; and

(ii) The amount so computed shall be reduced by the rent

payable by the employee.

36
Problem 1.

X an officer of the Government of Madhya Pradesh, draws Rs

25,000 per month as basic pay during the A.Y 2008-09.

The Government has provided him rent–free unfurnished flat

whose market rent is Rs 7,800 per month.

As per Government rules the licence fee of the flat is Rs. 1,250
per month.

Determine the value of the perquisite in respect of rent-free

accommodation for the assessment year 2008-09.

37
Solution:

In the case of Government employees the value of rent-free

accommodation is equal to licence fee as fixed by the
Government.

The value of rent- free flat will be Rs125012=Rs 15,000.

Problem2:

X an employee of ABC (P) Ltd. posted at Ajmer draws during

the previous year 2008-09 the following:

(a) Basic salary of Rs. 3, 00,000 per annum.

(b) Rs. 10,000 as dearness allowance (forming part of salary)

and

(c) Rs 5,000 as commission.

Besides company has provided him a rent-free unfurnished

accommodation at Ajmer (population 18 lacs ).

The house is owned by the company.

The fair rent of the house is Rs.50, 000 per annum.

Determine the taxable value of rent-free accommodation for the

assessment year 2008-09.

38
Solution:

The value of rent- free accommodation owned by the company

depends on the salary of the employee.

The salary of X is Rs 3,00,000+10,000+5000=Rs3,15,000

As accommodation is in a city having population of more than

10 lacs and less than 25 lacs, 10% of the salary is the perquisite
value. i.e. Rs 31,500.

39
Problem 3:
X is likely to receive during the previous year ending March 31,
2008,emoluments consisting of:

Basic pay: Rs.1, 62,000;

Special allowance: Rs.17, 000 and reimbursement of medical

expences: Rs.3, 800.

His employer has provided him a rent –free furnished flat in

Mumbai.

The lease rent of the unfurnished flat is Rs.50, 000.

Some of the household appliances provided to X (with effect

from June 1, 2007) are owned by the employer (cost price of
which is Rs. 36,000, date of purchase is Ist April 1960 and
written down value as on April1 2008,is Rs.620).

Employer pays Rs.10, 000 annually as hire charges for three air-
conditioners installed throughout the previous year in rent-free
flat.
Compute the value of perquisite if:
(a) X is a secretary in the Ministry of Law and Rs.4, 000
is the licence fee of unfurnished flat as per Central
Government rules.

(b) X is Managing Director of ABC (P) Ltd.

Does it make any difference if X, has been provided a hotel

accommodation throughout the year (tariff being Rs.1, 20,000
per annum)

40
Solution:

Valuation of unfurnished flat:

1.If X is secretary to the Central Government:

Rs. 4,000 being the licence fee is the taxable value of the
perquisite.

2. If X is the Managing Director of ABC Ltd.

Salary for the purpose of calculating the taxable value

works out to be Rs.1,79,000 (i.e.,Rs.1,62,000 +
Rs.17,000).

Lease rent of the flat Rs.50,000

15% of salary (1,79,000) Rs. 26,850

Least of above two is the taxable value Rs.26,850

Valuation of furniture:

10% per annum of the original cost of furniture

[Rs.36,00010/10010/12] Rs. 3,000

Add: Rent of air conditioners Rs.10,000

Valuation of furniture Rs.13,000

41
Valuation of furnished flat:

Valuation of
Unfurnished Furniture Furnished
Flat Rs Flat
Rs
If X is a secretary
to Central 4,000 13,000 17,000
Government
If X is Managing
Director of ABC 26,850 13,000 39,850
Ltd.

Valuation of Hotel accommodation:

Actual charges paid /payable to hotel Rs.1,20,000

24% of salary Rs. 42,960

Least of the above is the taxable value Rs. 42,960

Problem 4:
Mr. B has been provided with a residential accommodation by
his employer for which the employer paid Rs. 42,000 as rent.

Total salary of B is Rs.1, 80,000 and he is required to pay

Rs.1800 p.m towards rent.

His employer has provided him with furniture the cost of which
is Rs2, 00,000. The employer has also hired an air conditioner,
the hire charges of which are Rs1,000 per month.
Find the perquisite value of residential accommodation.
42
Solution:

Valuation of unfurnished accommodation:

Amount of rent paid by the employer Rs.42,000

15% of salary Rs.27,000
Least of the above Rs.27,000
Less: Rent paid by B (180012) Rs.21,600
--------------
Value of unfurnished accommodation Rs 5,400
--------------

Valuation of furniture:

10% of the cost of furniture Rs.20,000

Add: Rent of furniture (100012) Rs.12,000
--------------
Value of furniture Rs.32,000
--------------

Value of furnished accommodation:

Value of unfurnished accommodation Rs. 5,400

Add: Value of furniture Rs. 32,000
--------------
Value of furnished accommodation Rs. 37,400
--------------

43
Valuation of perquisite in respect of free education:

Training of employees:

Amount spent for providing free education facilities to

employees and training of employees in not taxable.

Fixed education allowance for children:

Fixed education allowance given in cash by the employer

to employees to meet the cost of education of the family
members of the employees is not taxable to the extent of
Rs 100 per month per child (for a maximum of two
children).

An additional exemption is available in respect of allowance

granted to meet hostel expenditure at the rate of Rs.300 p.m per
child for a maximum of two children.

The remaining amount is taxable.

44
Education facility in employer’s institute.

Different situations Amount chargeable to tax

Where the educational institution is
owned and maintained by the
employer and educational facility is
provided or where such educational
facility is provided in any institute by
reason of employee’s employment
with the employer

(a) Where educational facility is

provided to employee’s
children.
-Where cost of education or value Nil
of such benefit does not exceed
Rs.1, 000 per month per child (no
restriction on number of children)

- Where such amount exceeds Rs

1,000 per month per child Cost of such education in
a similar institution in or
near locality- Rs 1000 per
month per child – amount
paid or recovered from the
employee.
(b) Where educational facility is Cost of such education in
provided to member of his a similar institution in or
household (other than near the locality –amount
children) paid or recovered from the
employee.
45
Notes: 1. Grand children and other member of the household are
included in (b).

2.If bills are issued in the name of employee and paid by the
employer, then the perquisite is taxable in the hands of all
employees; otherwise it is taxable in the hands of specified
employees.

Scholarship: Amount of scholarship given by the employer-

company to children of its employees solely at its discretion
without reference to terms of employment is not assessable as
perquisite in the hands of employees.

Valuation of perquisite in respect of free domestic

servant.

The value of benefit to the employee (or any member of

his household) resulting from provision by the employer of
the services of a sweeper, a gardener, a watchman or a
personal attendant shall be:

Actual cost to the employer minus amount paid by the

employee for such services.

The following points should be noted:

1.If a domestic servant is engaged by the employee and

salary is paid/ reimbursed by the employer the perquisite
is taxable in the case of all employees.

46
If however the domestic servant is engaged by the
employer, the perquisite is taxable in the hands of
specified employees only

2. Domestic servant allowance given to an employee is

always chargeable to tax. It is taxable even if the
allowance is used for engaging domestic servant.

Valuation of perquisite in respect of interest free loan

or loan at concessional rate of interest:

Where interest free or loans at concessional rate of

interest is provided to the employee or any member of his
household by the employer or any person on his behalf,
the value of such benefit w.e.f 1.4.2004 shall be:

1. Sum equal to the interest computed at the rate

charged per annum by SBI, as on first day of the
relevant previous year in respect of loans for the
same purpose advanced by it.

Steps are:

(a) Interest is calculated on the maximum outstanding

monthly balance at the rate as above.
(b) Less: Interest actually paid by the employee.

2. In the following cases, the perquisite is not

chargeable to tax:

(a) If such loan is made available for medical treatment in

respect of disease specified in rule 3A.

47
 However where any part of such loan has been
reimbursed to the employee under medical insurance
scheme, such amount shall be reduced.

(b) In case of small loans upto Rs.20, 000 the perquisite

value shall be deemed as nil.

3.Interest is calculated on the “ maximum outstanding

monthly balance” means the aggregate outstanding
balance of each loan as on last day of the each month.

Problem1:

An Ltd employs X. On June 1, 2004, the company gives

an interest –free loan of Rs 14 lacs repayable in 10 years.
Compute the value of the perquisite in respect of interest
free loan. The lending rate of SBI for similar loans is as
follows:
On 1st of April 2003: 10%
On 1st of January 2004: 9.5%
There is no change in rate of interest thereafter.

Solution:

Interest computed on Rs 14 lacs @ 9.5% p.a =Rs1,10,833

The perquisite value taxable in the hands of X =Rs1,10,833

Problem 2:

48
Y is employed by B Ltd. On April 30th 2004, he takes a loan
of Rs 25,000 from B Ltd. B Ltd. recovers 7% per annum
from Y.

Compute the perquisite value of Y on account of this.

SBI lending rate for similar loan is 13.35% on 1st April 2004

Solution:
The perquisite value is 13.35-7%=6.35% on Rs
25,000=Rs 1588 and is chargeable in the hands of Y.

Gas, electric energy and water:

It is taxable only in the case of persons having substantial

interest in the company.

The value of the benefit resulting from the supply of gas,

electric energy or water shall be equal to:

Amount paid by the employer to the supplier agency

minus amount paid by the employee for such services.

Use of employer’s movable assets:

Where an employee or any member of his household,

uses any moveable asset (excluding cars and laptops and
computers) belonging to the employer or hired by him, the
value of such perquisite shall be:

49
10% of the actual cost or amount of hire charges paid or
payable by the employer minus amount if any paid by the
employee for such use.

Sale of movable assets at confessionals rate.

Where a moveable asset belonging to the employer is

sold to the employee or any member of his household, at
confessionals price, the value of benefit shall be:

(a) Actual cost of the asset to the employer minus

(b) Depreciation@ 10% for each completed year of use
(20% in case of cars and 50% in case of electronic
items) by reducing balance method minus
(c) Amount paid by the employee in consideration
Of such transfer.

Valuation of perquisite in respect of:

 Traveling, stay etc. on a holiday.

 Free transport facility.
 Motor Car/other conveyance
 Free meals, gift voucher or token, credit card,
recreation club and any other benefit:

From A.Y 2006-07 the value of this perquisite shall be Nil,

since the same is charged to fringe benefit tax.

50
Statement of perquisite/profit in lieu of salary.

The employer shall furnish to the employee, a statement

giving a correct and complete particulars of perquisites or
profits in lieu of salary and the value thereof in-

(a) Form no 16, if total salary of the employee is upto

Rs1, 50,000 or
(b) Form No. 12BA, if the total salary of the employee
exceeds Rs 1,50,000.

A copy of such statement shall be filed along with the

return.

Valuation of Leave travel concession in India [Sec.10

(5)]

The exemption in respect of value of leave travel

concession and passage money is available to Indians as
well as foreign citizens.

The following points need consideration:

 Journey may be performed in service or after

retirement-The amount exempt under sec 10(5) is
the value of any travel concession or assistance
received or due to the assesses:

(a) From his employer for himself and his family in

connection with his proceeding on leave to any
place in India;

51
 (b) from his employer or former employer for himself
and his family in connection with his proceeding
to any place in India after retirement from
service or after termination of his service.

The exemption shall be available to maximum two

children of an individual except in case of children
born before 1.10.1998 or multiple births after one
child.

The amount of exemption is given below and amount

of exemption is restricted to amount actually incurred
on the performance of a journey:

(i) Journey performed by air: An amount not exceeding

the air economy fare of the national carrier;

(ii) Places of origin of journey and destination

connected by rail and the journey performed by any
mode of transport except by air:

An amount not exceeding the air- conditioned first class

rail fare; and

(iii) Places of origin of journey and destination or part

thereof not connected by rail:

(a) where a recognized public transport system exists, an

amount not existing the first class or deluxe class
fare, as the case may be, on such transport;

52
(b) where no recognized public transport system exists,
an amount equivalent to the air–conditioned first
class rail fare, for the distance of the journey as if
performed by rail.
(c) The fare shall be computed for the journey to the
place of destination by the shortest route.
(d) The exemption is available to an individual in respect
of two journeys performed in a block of four calendar
years; the first block being of 1986 to 1989 and the
second being of 1990 to 1993 and so on-
2002-2005, 2006-2009 (Jan1, 2006 to Dec 31 st
2009).

Where such travel concession is not availed by an

employee during a block of four calendar years, an
additional journey may be availed in the first year of
the next block of four calendar years.

It is pertinent to note that the exemption is available

in respect of journeys actually undertaken; payments
received without actually performing the journey are
totally taxable as salary.

TAX TREATMENT OF PROVIDENT FUND (PF)

Provident fund scheme is a retirement benefit

scheme.

Under the scheme, a stipulated sum is deducted from

the salary of the employee as his contribution
towards the fund.

53
The employer also, generally, contributes
simultaneously same amount out of his pocket to the
fund.

The amount so collected is invested in approved

securities as decided by the Board of Trustees of
Provident fund.

Thus the credit balance in the account of an

employee consists of his own contribution and the
contribution of the employer and also the interest on
the balance of both.

As a general rule the accumulated amount is paid at

the time of retirement/ resignation of the employee.

The amount of contribution is eligible for tax incentive

under Sec 80C (upto A.Y 2005-06 it was under Sec
88).

Kinds of provident funds:

(a) Statutory provident fund.

(b) Recognized provident fund.
(c) Unrecognized provident fund.

54
(a) Statutory Provident Fund:

It is set up under the provisions of Provident Fund

Act, 1925.

This fund is maintained by the Government and the

Semi- Government organizations, local authorities,
railways etc.

(b) Recognized Provident Fund:

A provident fund scheme to which the Employee’s

Provident and Miscellaneous Provisions Act, 1952
(hereinafter referred as PF Act, 1952) applies is
called recognized provident fund.

As per PF Act, 1952 any establishment employing 20

or more persons is covered by PF Act, 1952
(establishment employing less than 20 persons can
also join the provident scheme if the employer and
employees want to do so).

An establishment covered by the PF Act, 1952 has

the following two alternatives and may join any of the
following two schemes:

55
Alternative Additional formalities to Status for
scheme get the approval of the Income Tax
available Provident purpose
Commissioner

1. Scheme
of the Such a fund is
Govern- No recognized
-ment set provident fund
up under
the PF Act,
1952

A trust has to be created If it is

by the employer and recognized by
employees to start own the
provident fund scheme. commissioner
of Income Tax
2. Own The funds have to be in accordance
scheme of invested in accordance with the rules
provident with the rules given under contained
fund the PF Act, 1952. under Part A
of Fourth
If the scheme satisfies Schedule to
certain rules given under the Income
the PF Act, 1952, it will Tax Act, it
get the approval of PF becomes
commissioner recognized
provident
fund.

56
© Unrecognised Provident Fund:

If a provident fund is not recognized by the

commissioner of Income tax, it is known as
unrecognized provident fund.

Public Provident Fund (PPF)

The Central Government in order to mobilize the

savings of general public had established the above
scheme.

It can be opened in Post office or SBI or designated

branches of Nationalised Banks.

The account can be opened by any body, whether a

salaried employee or not.

The minimum contribution is Rs.500 and the

maximum in a financial year is Rs 70,000, which can
be deposited in lump sum or in instalments.

The account is opened for 15 years, which can be

extended for another term of five year and so on.

The interest at present is @ 8% per annum payable

at the end of the year. Only the deposits made upto
5th of the month earns interest for that month.

Withdrawals are permitted as per rules.

57
Tax treatment

Statutory Recognised Un- Public

Provident Provident recognised Provident
Fund Fund Provident Fund
Fund
Employer’s Exempt Exempt Exempt Employer
contribution from tax upto 12 % from tax. does not
to of salary. contribute
provident Excess of
fund employer’s
contribution
over 12 %
of salary is
taxable
Tax rebate Available Available Not Available
under sec available
80C on
employee’s
contribution
Interest Exempt Exempt Exempt Exempt
credited to from tax from tax if from tax from tax
provident rate of
fund interest
does not
exceed the
notified rate
of interest
(at present
8.5%).
Excess of
interest
58
 over
notified rate
of interest
is taxable
Lump sum Exempt Exempt Payment Exempt
payment at from tax from tax received in from tax
the time of respect of
retirement employee’s
or own
termination contribution
of service. is exempt
from tax.
Interest on
employee’s
contribution
is taxable
under the
head “
Income
from other
sources”
Balance
(i.e.,
employer’s
contribution
and
interest
thereon) is
taxable
under the
head
“Salaries”
59
 Notes:
1. “Salary” here means basic salary. It includes
dearness pay, if terms of employment so
provide. It also includes commission where
commission is determined at fixed
percentage of turnover achieved by the
employee.

Tax treatment of approved superannuation fund.

The tax treatment in the case of a superannuation fund,

which has been and continues to be approved by the
commissioner in accordance with the rules contained in Part
B of the Fourth Schedule is as follows:

 Employer’s contribution is exempt from tax.

 Employee’s contribution qualifies for tax rebate
under sec 80C.
 Interest on accumulated balance is exempt from
tax.

PERMISIBLE DEDUCTIONS FROM GROSS TOTAL

INCOME

Deductions available to individuals and HUF’s

1.Under Sec 80C – This is introduced from A.Y 2006-07.

It is allowed to an individual or a HUF. The deduction is

allowed for the amount paid or deposited by the assessee
during the previous year in specified schemes given below.

60
The total amount of deduction shall not exceed Rs 1 lac.

The following are eligible:

 Life insurance premium.

Premium (including arrears of premium) paid on life
insurance policy on the life of an assessee or his /her
wife/husband/child upto 20%of sum assured.

 Contribution to Statutory Provident Fund or

Recognized Provident Fund or approved
Superannuation Fund.

 Contribution to PPF scheme in the name of

self or spouse or children.

 Investment in National Savings Certificate

(NSC) VI th issue.
Interest accruing on the national savings certificate
purchased in earlier years is considered as
deemed investment and is also eligible.

 Contribution to Unit Link Insurance Plan (ULIP).

 Subscription to any units of Mutual Fund

notified under sec 10(23D).

 Tuition fees whether at the time of admission or

thereafter, to any university, college, school or
other educational institution situated in India for the
purpose of full time education of any two children
of the assessee. However any development fees
61
 or donation or payment of similar nature shall not
be eligible for deduction.

 Repayment of housing loan taken from approved

financial institutions and;
Any instalment of any self-financing or other
scheme of any development authority.

 Investment in debentures or equity shares of

public company engaged in infra structure
including power sector or units of a mutual fund
proceeds of which are utilized for developing,
maintaining etc of a new infrastructure facility.

 Amount deposited as term deposit for a period of 5

years or more in a bank as per scheme framed by
Government in this regard.

Deduction under sec 80CCC:

Deduction in respect of pension fund of LIC or other

insurance company.

Deduction under sec 80CCD

Deduction in respect of contribution to pension

scheme of Central Government.

Overall Limit on deductions u/s 80C, 80CCCand

80CCD [Sec 80CCE]

The aggregate amount of deductions u/s sec 80C,

62
 80CCC and 80CCD are subject to an overall limit of
Rs.one lac.

Deduction in respect to Medical Insurance Premia.

[Sec 80D]

Deduction is allowed for any medical insurance premium

under an approved scheme of General Insurance
Corporation of India, (popularly known as MEDICLAIM or of
any other insurance company paid by cheque, out of
assessee’s taxable income in respect of the following.

Insurance on he health of the assessee, or wife or husband

or dependent parents or dependent children.

Amount of deduction
Maximum deduction Rs.15, 000.

In case the person insured is a senior citizen (exceeding 65

years of age), the maximum deduction allowable shall be Rs
20,000.

Deduction in respect of medical treatment etc. and

deposit made for maintenance of handicapped
dependents. [Sec 80DD]

Deduction is allowed in respect of-

(i) Any expenditure incurred by an assessee, during
the previous year, for the medical treatment
(including nursing) training and rehabilitation of

63
 one or more dependent person with disability;
and
(ii) amount deposited under an approved scheme of
LIC of India or other insurance company for the
benefit of a dependent person with disability.
Amount of Deduction:

The deduction allowed is Rs.50, 000.

In case of a person with severe disability the amount of

deduction is Rs 75,000.

Deduction in respect of medical treatment etc

[Sec 80DDB]

A deduction of Rs 40,000 or actual amount paid which ever

is less is allowed to an individual in respect of medical
treatment of specified disease or ailment for himself or a
dependent.

In case the amount is paid in respect of the assessee or a

person dependent on him, who is a senior citizen, the
deduction allowed will be upto Rs 60,000.

Deduction in respect of repayment of loan taken for

higher education [Sec80E]

An individual assessee who has taken a loan from any

financial institution or any approved charitable institution for
the purpose of pursuing higher education is allowed the
deduction.

64
Amount of deduction:

From A.Y 2006-07: any amount paid by the assessee in the

previous year, out of his taxable income, by way of interest
on such loan, without any limit.

The deduction will be allowed for a maximum period of 8

years beginning from the year in which payment of interest
on the loan begins or till the interest is paid in full, whichever
is earlier.

Repayment of loans or interest on such loans, taken by

the parents for higher education of the child, is not
eligible for deduction.

(from the A.Y 2008-09 the loan taken for the purpose of
higher education of spouse, children is also eligible.)

DONATIONS [SEC80G]

1. 100% deduction is allowed in respect of donation to:

(i) National Defence Fund.
(ii) Prime Minister’s National Relief Fund etc.

2. 50% deduction is allowed for donations to:

(i) Jawaharlal Nehru Memorial Fund.
(ii) Prime Minister’ drought relief Fund etc.

Conditions:

If aggregate of donations given to institutions established for

charitable purposes and also some others which do not

65
serve the national purpose directly and are referred to in the
rules exceeds 10% of his income. Such excess shall not
qualify for deduction.

DEDUCTION IN RESPECT OF RENT PAID [SEC80GG]

This deduction is allowable to any assessee including an

employee who is not in receipt of hose rent allowance
(HRA) u/s 10(13A).

Deduction: A deduction is allowable in respect of rent paid

by an assessee, for his residential accommodation, whether
furnished or unfurnished.

Conditions:

(i) The Assessee, his spouse, or minor child or the HUF of

which he is a member, does not own a residential house at
the place of his employment/business or profession; and

(ii)The assessee does not own any residential house at any

other place, the value of which is determined as self
occupied property, at nil.

(iii) The assessee files a declaration in Form10BA (Rule

11B).

Amount of deduction: Least of the following is allowable-

(i) Rent paid minus 10% of assessee’s total income; or

66
(ii) Rs. 2,000 p.m.; or

(iii) 25% of total income.

Note: Total income means total income of assessee after

allowing all deductions except the one provided under sec
80GG itself.

The total income of a salaried employee will be arrived at

after allowing deductions under 80C to 80U except 80GG.

DEDUCTION IN RESPECT OF INTEREST ON BANK

DEPOSITS, CERTAIN SECURTIES UNDER SEC 80L:

From the assessment year 2006-07, the deduction has

been withdrawn.

In the AY 2005-06 the amount of deduction was Rs.12, 000

and additional deduction of Rs 3,000 was allowed
exclusively for certain Central or State Government
Securities.

DEDUCTION IN RESPECT OF DISABLED PERSONS

[SEC 80U].

The deduction is allowable to resident individual suffering

from any disability.

Amount of deduction: Rs. 50,000.

In case of persons with severe disability, a deduction of Rs.

75,000 is allowed.

67
Condition: The assesse shall furnish a certificate from the
approved medical authority in the prescribed form along
with return of income.

RELIEF ON SALARY ARREARS/ADVANCE, GRATUITY,

PENSION, FAMILY PENSION ETC [SEC 89(1)].

Salary in arrears/advance, received in lump sum, is liable to

tax in the year of receipt (unless it has already been
subjected to tax earlier).
Some relief is however, allowed from tax on such receipts.

Relief is also available in respect of gratuity for past

services of not less than five years, leave encashment,
compensation on termination of service, payment in
commutation of pension, family pension etc.

In certain cases the relief is also available at source.

Claiming of relief is optional and at the discretion of the

assessee and will be claimed if it is advantageous to the
assessee.

The computation of tax relief is explained below:

The relief can be claimed even if the assessee was not

liable to tax and has not been taxed in the previous years to
which the salary arrears pertain.

In respect of Arrears/Advance of salary or family

pension.

68
(i) Calculate the tax on total income of the previous year in
which additional salary (i.e. salary in arrears or advance) is
received.

(ii) Calculate the tax on total income as reduced by

additional salary of the previous year.

(iii) From the amount of tax arrived in step (i) reduce the
amount of tax arrived at step (ii), to arrive at tax on
additional salary.

(iv) Ascertain the previous years to which the additional

salary pertain and add the respective amount of additional
salary to total income of such previous year.

(v) Calculate the tax on total income as increased by the

relevant additional salary in respect of each of such
previous years.
(vi) Calculate the tax on total income (without the additional
salary) of each of the said previous years.

(vii) From the amount in step (v), deduct the amount arrived
at step (vi), to calculate aggregate tax on additional salary.

(viii) The relief under sec89 (1) is the difference of (iii) and
(vii)

Problem:

Mr.X receives Rs. 3,15,740 during 2005-06 including

69
Rs.63, 450 as arrears of salary for the previous 3 years as
under:

Year Salary without Arrears

arrears
2002-03 Rs.72,095 Rs.3,525
2003-04 84,120 26,125
2004-05 1,03,840 33,800
Total 63,450

Compute the tax payable by Mr.X for A.Y 2006-07

Solution:
Rs.
Gross salary including arrears 3,15,740
Less: deduction u/c 80C of eligible
investment of Rs.1, 00,000 1,00,000
-------------
Taxable Income 2,15,740
-------------
Tax liability on Rs.2, 15,740 (Note1) 18,148
Add: Education Cess@2% 363
------------
Total Tax liability (A) 18,511
-------------
Gross salary without arrears (3,15,740-63,450) 2,52,290
Less deduction u/s 80C of eligible
investment of Rs.1 lac 1,00,000

70
Gross Income 1,52,290

Tax liability on Rs.1,52,290 (Note2) 5,458

Add: Education cess 109
Total Tax liability (B) 5,567

Tax liability on salary arrears

(A)-(B) = (18,511-5,567) = 12,944 (C)

Computation of tax liability for previous years and relief

u/s 89(1)
A.Y A.Y A.Y
2003- 2004-05 2005-06
04
Income without arrears of 72,095 84,120 1,03,840
salary
Add: Arrears of salary in 3,525 26,125 33,800
respective years
75,620 1,10,245 1,37,640
Less: Standard Deduction 25,207 30,000 30,000
(Note 3)
Net Income 50,413 80,245 1,07,640
Tax Liability (Note4) 41 5,050 10,528
Less rebate u/s 88 D - - 2,888
Less rebate u/s88 on eligible 41 5000 6,000
investments of Rs 20,000,
71
25,000,and 30,000 respectively
Net Tax payable Nil 50 1,640
Add: Surcharge @5% for A.Y - - -
2003-04 and Nil for subsequent
years.
Tax payable (X) Nil 50 1,640
Income without arrears of 72,095 84,120 1,03,840
salary
Less Standard Deduction 24,032 28,040 30,000
Net Income 48,063 56,080 73,840
Tax Liability Nil 608 3,768
Less rebate u/s (88D and 88) Nil 608 3,768
Net Tax Payable (Y) Nil Nil Nil
Additional Tax Liability on Nil 50 1,640
salary arrears (X)-(Y)
Aggregate additional Tax on salary arrears i.e. Rs.
(Rs Nil+Rs.50+Rs.1640) Z 1690
Relief available u/s 89(1) is thus, ©-(Z) i.e.,
(Rs.12, 944-Rs.1, 690) 11,254

Thus tax payable for A.Y 2006-07 shall be:

Tax payable on total income including
arrears for previous years as at (A) above 18,511
Less: Relief u/s 89(1) 11,254
Net Tax Payable 7,257
Note1: Tax liability on Rs2,15,740:
On Rs.1,00,000 = Nil
On Next Rs. 50,000 @10% =Rs.5, 000
On Next Rs. 65,740 @ 20% =Rs13,140
------------- -------------
Total 2,15,740 Rs.18, 140
Note2: Tax liability on Rs1,52,290:
72
On Rs.1,00,000 =Nil
On Next Rs. 50,000 @ 10% = Rs.5,000
On Next Rs. 2,290 @ 20% =Rs. 458
------------ -----------
Total Rs.1,52,290 Rs.5,458
Note3: Standard Deduction: For A.Y 2003-04 and 2004-
05 it is one third of gross salary.
For A.Y 2005-06 it is 40% of salary subject to maximum
of Rs.30,000

Note4: Rate of Income tax for A.Y 2003-04 to 2005-06

was:
Rs 50000 Nil, 50,000 to 60,000 @ 10% on sum exceeding 50,000 and 60,000
to 1,50,000 @ 20% on the amount exceeding 60,000.

COMPUTATION OF INCOME UNDER SALARIES:

A.Y 2008-09

It is computed in the following manner:

1.Gross Salary
a. Salary as per provisions of sec 17(1)
b. Value of perquisites under sec 17(2)
c. Profit in lieu of salary sec 17(3)
d. Total

2.Less allowances to the extent exempt under sec10

3.Balance (1-2)

4.Deductions:
a. Entertainment allowance sec16 (ii).
b. Tax on employment sec16 (iii)

73
5. Aggregate of 4 (a & b)

6. Income chargeable under the head salaries 3-5.

7. Add any other income reported by the employee.

8.Gross total income (6+7).

9. Deduction under
Chapter VI-A
Gross amount Qualifying Amt Deductible amt
ie: deduction under 80D, 80DD, 80DDB, 80E, 80G,80GG and
80U etc.
Total
10. Aggregate of deductible amt.

11.Total Income (8-10)

12. Deduction under 80C, 80CCC, 80CCD

13.Taxable Income (11-12)

14.Tax on total Income

15.Relief under sec 89 (attach details)

16. Tax payable (14-15)

17. Add: surcharge and education cess thereon.

18. Less Tax deducted at source

19.Tax payable /refundable. (17-18)

74
Problem1:

Mr.X a Central Government Officer in Delhi is receiving a:

Basic pay of Rs.12, 750 p.m and DA at 90% of basic.

He also receives CCA @ Rs.300 p.m.

He is allowed transport allowance of Rs. 800.p.m.

He lives in his own house and is allowed HRA @ 30 % of

basic pay.

The following are other particulars:

Contribution to G.P.F per month Rs.2, 200

Life insurance premium (being life insurance

Policy of Rs.1, 00,000 taken in the name of Rs.10,500
wife)

Contribution to Public provident fund Rs.10,000

Subscription to shares /debenture in eligible Issues

of capital and units of eligible mutual funds. Rs.30,000

Repayment of HDFC loan taken in 2004

towards principal Rs.27,300

Compute his taxable income and tax payable for

A.Y 2008-09

75
Solution:

Income from salary

Rs.
Basic pay @ Rs12, 750 p.m 1,53,000

Dearness allowance 90% of basic pay 1,37,700

House rent allowance 30% of basic 45,900

City compensatory allowance @Rs.300 p.m 3,600

Transport allowance Rs 800 p.m

Less: exempt Rs.800 p.m -

Net Salary 3,40,200

Less deduction under sec 80C

-GPF@ Rs.2200 p.m 26,400

-Life Insurance premium 10,500
Deposit in PPF 10,000
Repayment of housing loan27,300
Subscription in eligible
mutual funds 30,000
---------
1,04,200
---------- 1,00,000

Taxable income 2,40,200

76
Tax :
On Rs. 1,10,000 Nil
On next Rs. 40,000 @ 10% 4,000
On next Rs. 90,200 @ 20% 18,040
-------------- --------------
On total Rs. 2,40,200 22,040 22,040

Add; Education cess @ 3% 661

Total tax liability 22,701

Problem 2:
Mr. A receives the following salary and perquisites during
the previous year 2007-08.

Basic Pay: Rs. 12,375 p.m, Dearness allowance: @ 40 %

of Basic, Bonus: Rs.12, 375. Transport allowance: Rs.800
p.m.

Rent-free furnished accommodation in Mumbai for which the

employer pays rent of Rs 3,800 p.m.

Cost of furniture provided to Mr. A is Rs. 60,000.

Reimbursement of expenditure incurred by Mr. A on

treatment of his wife in a nursing home: Rs 13,500.

The employer has decided to deduct Rs 2,400 p.m as TDS

every month from the salary of Mr. A upto Feb 2008.

Calculate the tax to be deducted in the month of March

2008.

77
Solution: Rs.

Basic Salary 1,48,500

Dearness Allowance 59,400

Bonus 12,375

Transport allowance Rs. 800

Less : exempt Rs.800 -

Reimbursement of
medical treatment Rs.13,500
Less : Exempt Rs.13,500 -

Rent free furnished house:

(i)Rent paid/payable by the employee Rs 45,600

(ii) 15% of salary

(1,48,500+59,400+12,375=Rs2,20,275) Rs.33,041

Least of (i) and (ii) is the value of

unfurnished accommodation Rs.33,041

Add: 10% of the

cost of furniture (Rs.60,000) Rs 6,000

Value of furnished accommodation Rs.39,041

39,041

Total Income from salary 2,59,316

78
Tax on salary:

On first Rs. 1,10,000 -

On next Rs 40,000 @10% 4,000
On next Rs.1,00,000 @ 20% 20,000
On next Rs. 9,320 @ 30% 2,796
----------- ------------
Total 2,59,320 26,796
======== ========

Total tax 26,796

Education cess @3% 804
-------------
Tax Liability 27,600

Less:Tax already deducted (240011) 26,400

Tax to be deducted in March 2006 1,200

79
Problem 3:
Mrs. X who lives in Mumbai, gets the following emoluments
during the previous year 2007-08.

Basic Salary: Rs.5, 400 per month

Dearness allowance
(part of salary for superannuation): Rs 200 p.m.

Entertainment allowance: Rs. 4500 per month

Special Allowance: Rs.1000 p.m
House rent allowance: Rs. 900 p.m.
Rent paid by her: Rs. 1600 per month.
Helper allowance for domestic use: Rs 5000 p.m.

While her employer contributes Rs 700 p.m towards

recognized provident fund.
Her contribution to provident fund is Rs 672 p.m.

Interest to be credited in the provident fund amounting to

Rs.30,000 for the year 2007-08 is at the rate of 18% per
annum.

During the year Mrs. X pays insurance premium of Rs. 1000

on the life insurance policy of her mother and Rs 1500 on
her own life insurance policy(sum assured Rs 50,000).

Premium of Rs 3000 on the life insurance policy of her

husband falls due on March 23, 2008 though she can only
pay the same on April 10th 2008

Determine the tax liability of Mrs. X for the assessment year

2008-09.

80
Solution:
Rs.
Basic Salary ( Rs 540012) 64,800

Dearness allowance ( 20012) 2,400

Entertainment allowance (450012) 54,000

Special allowance (100012) 12,000

Helper allowance (500012) 60,000

House Rent allowance Rs 10,800

Less : exempt (Note 1) Rs 10,800 Nil

Employer’s contribution towards

recognized provident fund in excess of 12%
of salary [ (700 12) –12% of (64,800+2400) 336

Interest credited in provident fund in excess

of 8.5 % (Rs 30,0009.5/18) 15,833

Gross Salary 2,09,369

Deduction under Sec16

Entertainment allowance Nil

Income from Salary 2,09,369

81
Deduction under sec 80 C

Employee’s contribution towards

recognized provident fund (67212) 8064

Insurance premium on the policy

of mother ( not eligible) Nil

Insurance premium on the life

insurance policy of self 1500

Insurance premium on the life

insurance policy of husband Mr X
(due but not paid in the previous year) Nil

9564

Taxable salary 1,99,805

Tax on the salary 1,99,805

On Rs. 1,45,000 Nil

On next Rs. 5,000 @ 10% 500
On next Rs 49,805 @ 20% 9,961
------------- ------------
Total 1,99,805 10,461
======= =======
Tax 10,461
Education cess @ 3% 314
Total tax liability 10,775

82
Note1
Calculation of House Rent Allowance (HRA) exempt:
Rs.
1.HRA received: 10,800
2.Rent paid-10% of salary (Rs.19,200- Rs.6,720): 12,480
3. 50% of salary: 33,600

Least of the above is exempt.

Amount exempt: 10,800

83