BASIS OF CHARGE: [Section 15]

As per Section 15, salary consists of the following:

1. any salary due from an employer or a former employer to an assessee in the previous year, whether actually paid or not;

2. 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 or before it became due;

3. 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 for any earlier previous year.

4. Once salary is taxed on due/receipt basis, it will not be taxed again on receipt/falling due, as the case may be.

5. Any salary, bonus, commission or remuneration, by whatever name called, due to or received by, a partner of a Firm from the firm is not regarded as salary under this head.

6. The assessee can claim relief u/s 89(1) for arrears or advance salary.

7. Loan from employer is not salary. Hence, advance salary is taxable, while advance against salary is not.

CHARGEABILITY

Salary is chargeable to tax on “due” or “receipt” basis whichever is earlier.

As per Sec. 17(1), salary includes the following:

• Wages

• Any annuity or pension

• Any gratuity

• Any fees, commissions, perquisites or profit in lieu of or in addition to any salary or wages

• Any advance of salary

• Any payment received by an employee in respect of any period of leave not availed by him

• 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

• Transferred balance in a recognized provident fund to the extent it is taxable

• Contribution by the Central Government or any other employer to the account of an employee under a pension scheme referred to in Sec. 80CCD.

SPECIFIC EXEMPTIONS

Allowances

Allowances Fully taxable in all cases:

1. City Compensatory Allowance

2. Fixed Medical Allowance

3. Tiffin/Lunch/Dinner/Refreshment Allowance

4. Servant Allowance

5. Dearness Allowance

6. Project Allowance

7. Overtime Allowance

8. Interim Allowance

9. Any Other Cash Allowance

Allowances Not Charged to Tax

1. Allowance to Government Employees outside India : Any allowance paid or allowed as such outside India by the Government of India to a citizen of India for rendering services outside India is exempt u/s 10(7).

2. Allowance to High Court or Supreme Court Judges u/s 22A & sumptuary allowance u/s 22C of the High Court Judges (Conditions of Service) Act, 1954 is exempt from tax. Allowance to Supreme Court Judges (Conditions of Services Act, 1958 is also exempt.

3. Allowance paid by United Nations Organization-Exempt by virtue of Section 2 of United Nations (Privileges and Immunities) Act, 1974.

4. Compensatory allowance under Article 222(e) of the Constitution of India received by a Judge — Exempt from tax.

Allowances that are partially Taxable

(1) House Rent Allowance u/s 10(13A)

1) The least of the following is exempt from tax:

1. An amount equal to 50% of salary*, where residential house is situated at Bombay, Calcutta, Delhi or Madras and an amount equal to 40% of salary* where residential house is situated at any other place; or

2. House rent allowance received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year; or

3. The excess of rent paid over 10% of salary*.

*Salary for the purpose computing exemptions of Gratuity, HRA and Leave Encashment = Basic + Dearness allowance (forming part of retirement benefits) Commission based on the % of turnover (paid in course of employment) — Salaried employees drawing HRA up to Rs. 3,000 p.m are exempted from production of rent receipt for the Purpose of TDS only.

(2) Special Allowances [10(14)] (i) (Rule 2BB (1)]

Following allowances are not taxable to the extent they are utilized for the purpose specified

1. Any Allowance granted to meet the cost of travel on tour or on transfer including any sum paid on connection with transfer, packing and transportation of personal effects on such transfer

2. Any Allowance whether granted on tour or for the period of journey in connection with transfer to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty;

3. Any Allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit, provided that free conveyance is not provided by the employer

4. Any Allowance granted to meet the expenditure incurred on a helper where such helper is engaged for performance of the duties of an office or employment of profit

5. Any Allowance granted for encouraging the academic, research and training pursuits in educational and research institutions

6. Any Allowance granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of duties of an office or employment of profit

(3) Special Allowances [10(14)] (ii) (Rule 2BB (2)]

1. Special Compensatory Allowance in specified areas to extent specified.

2. Tribal Area Allowances in specified states up to Rs. 200 p.m.

3. Any Allowance granted to an employee working in any transport system for meeting his personal expenditure during his duty performed in the course of running of such transport from one place to another place, provided that such employee is not in receipt of daily allowance – up to 70% of allowance, maximum of Rs. 6,000 p.m.

4. Children education allowance @ Rs. 100 p.m. per child, maximum of 2 children.

5. Children hostel allowance @ Rs. 300 p.m. per child maximum of 2 children.

6. Compensatory Field Area Allowance in specified areas @ Rs. 2,600 p.m.

7. Compensatory modified field area allowance @ Rs. 1,000 p.m.

8. Counter insurgency allowance @ Rs. 3,900 p.m. to members of armed forces.

9. Transport Allowance granted to an employee (other than in 10 below) to meet his expenditure for the purpose of Commuting between the place of his residence and the place of his duty @ Rs. 800 p.m.

10. Transport Allowance granted to an employee who is blind or orthopedically handicapped with disability of Lower extremities to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty @ Rs. 1,600 p.m.

11. Underground Allowance for employees in underground coal mines @ Rs. 800 p.m.

12. High Altitude Allowance for members of armed forces operating in high altitude areas @ Rs. 1,060 p.m. for Altitude of 9,000 to 15,000 feet and @ Rs. 1,600 for altitude above 15,000 feet.

13. Special Compensatory highly active field area allowance to members of armed forces @ Rs. 4,200 p.m.

14. Island duty Allowance to the member of armed forces @ Rs. 3,250 pm.

PERQUISITES

The term “Perquisite is generally understood to be a benefit or an amenity provided to the employees by the employer, directly or indirectly, whether in cash or in kind, in addition to salary and wages. u/s 17(2) it is inclusive definition.

(A) Perquisites Taxable in the Hands of all Employees

1. Value of rent-free accommodation provided to the assessee by his employer. [Section 17(2)(i)].

2. Value of concession in rent in respect of any accommodation provided to the assessee by his employer. Concession in the matter of rent shall be deemed to have been provided if a) the value of the accommodation (as determined under rule 3) exceeds the rent recoverable from/payable by the assessee (in case of unfurnished accommodation) b) The value of accommodation & value of furniture & fixtures (as determined under rule 3) exceeds the rent recoverable from/payable by the assessee (in case of furnished accommodation) c) The value of licence fees & value of furnitures & fixtures exceeds rent recoverable from/payable by the assessee and any charges paid/payable for furniture & fixtures by the assessee (in case of furnished accommodation provided by Central/State Government) [Section 17(2)(ii)]

3. Amount paid by employer in respect of any obligation which otherwise would have been payable by Employee. [Section 17(2)(iv)]

4. Amount payable by an employer, directly or indirectly, to effect an assurance on the life of the assessee or
   To effect a contract for an annuity, other than payments made to a recognized provident fund or an approved superannuation fund or a deposit-linked insurance fund established u/s 3G of the Coal Mines Provident Fund & Miscellaneous Provisions Act or u/s 6C of Employees’ Provident Fund & Miscellaneous Act. [Section 17(2)(v)]. This perquisites are taxable on due basis even if the payment has not been actually been made by the employer during the previous year

5. The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee w.e.f 1.4.2010.

6. The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees w.e.f 1.4.2010

7. The value of any other fringe benefit or amenity as may be prescribed w.e.f. 1.4.2010.

(B) Perquisites Taxable only in Hands of Specified Employees

Value of other benefits or amenities granted or provided free of cost or at concession rate are taxable only in the hands of the following specified employees; i.e.,

1. Director-employee (even for a single day anytime during the previous year.)

2. Employee having substantial interest in Employer Company (preferably 20% or more beneficial ownership even for a single day anytime during the previous year.)

3. Employee drawing salary in excess of Rs. 50,000. (Income under the Salary Head by considering only actual monetary payments).

(C) Perquisites not Taxable in all cases

1. Medical treatment provided to an employee or any member of his family (spouse, children and dependent brothers, sisters and parents will be exempt in following cases:

1. Treatment in a hospital (including dispensary or clinic or nursing home) maintained by the employer;

2. Treatment in any hospital maintained by the Government or any local authority or any other hospital approved by Government for the purposes of medical treatment of its employees;

3. Treatment in respect of prescribed diseases or ailments in a hospital approved by the Chief Commissioner;

4. Premium paid for Medical Insurance only under a Central Government approved scheme;

5. Reimbursement of Health Insurance premium paid by employee for self, spouse, children and dependent brothers, sisters and parents;

6. Reimbursement of amounts actually spent for medical treatment other than treatment referred to in (a), (b) and (c) above, not exceeding Rs. 15,000/- in the financial year;

7. Actual expenditure on medical treatment outside India, including expenditure on travel and stay abroad of the employee or his family and also on travel and stay abroad of one attendant, to the extent permitted by RBI. Expenditure on travel abroad shall be excluded from perquisite only in case of employees whose gross total income before including the said expenditure is Rs. 2 lakhs or less.

2. Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India.

3. Sum payable by an employer to pension or deferred annuity scheme.

4. Employer’s contribution to staff group insurance scheme.

5. Rent-free official residence to a High Court or Supreme Court Judge.

6. Rent-free furnished residence to official of Parliament.

7. Conveyance facility to High Court/Supreme Court Judge.

8. Allotment of share, debentures or warrants to it employees under ESOP or ESOS on which FBT is payable.

VALUATION OF PERQUISITES

(A) Rent-free unfurnished Accommodation (Rule 3)

1. Central and State-Government employees. Equal to rent determined as payable by concerned employee in accordance with rules framed by Government for allotment of houses to its officers as reduced by the rent actually paid by the employee.

2. Semi Government and private sector employees.

1. For accommodation owned by employer

1. Situated in cities having population exceeding 25 lakhs as per 2001 census — 15% of salary (10% up to A.Y. 2005-06)

2. Situated in cities having population exceeding 10 lakhs but not exceeding 25 lakhs as per 2001 census — 10% of salary

3. Situated in other places — 7.5% of salary

— in respect of the period of occupying the accommodation by the employee as reduced by the rent actually paid by the employee.

2. For accommodation taken on lease or rent — actual rent or 15% of salary, whichever is lower as reduced by rent actually paid by the employee.
    

3. Accommodation in a hotel (other than provided for a period not exceeding 15 days on the transfer) — lower of 24% of salary or actual hotel charges as reduced by rent actually paid by employee.

For meaning of “salary” see Explanation to Rule 3 of IT Rules.

(B) Rent-free Furnished Accommodation

Value the accommodation as if unfurnished and add:

1. 10% per annum of the original cost of furniture if furniture is owned by the employer;

2. Actual hire charges (whether paid or payable), if furniture is hired by the employer and reduce the rent actually paid by the employee. Furniture includes radio sets, television sets, refrigerators, air-conditioners and other household appliances.

(C) Gas, Electricity or Water Supply Provided

1. Where employer has supplied gas, electricity or water for household purposes from his own sources without purchasing from any outside agency, the value of such benefits is manufacturing cost incurred per unit.

2. Where the employer has supplied gas, electricity or water for household purpose by purchasing from outside agency value is amount actually paid by employer.

(D) Free Domestic Servants

Actual cost to employer in respect of free services of a sweeper, a gardener, a watchman or a personal attendant as reduced by the amount paid by an employee.  

(E) Free or Concessional Educational Facility

Where educational institution itself is maintained and owned by employer and free educational facilities are provided to the children of the employee or where such free educational facilities are allowed in other educational institution by reason of his being in employment of that employer, then the perquisite value shall be the cost of such education in a similar institution in or near the locality provided the cost exceeds Rs. 1,000 per month per child as reduced by the amount paid by the employee and in other cases the value shall be the expenditure incurred by the employer.

Direct Payment — Direct payment by employer to the institution or reimbursement of education expenses of household member of employee is taxable in the hands of all employees. Thus, reimbursement of tuition fees is taxable.

Scholarship — Scholarships paid by employer to employee gratuitously and at his sole discretion without any reference to the terms of employment for meeting cost of education of his children is exempt u/s 10(16).

(F) Determination of Value of Prescribed Fringe Benefit or Amenity  

1. Interest free or concessional loan  

Value of loan to the employee or any member of his household shall be at the rates charged by State Bank of India as on 1st day of relevant previous year in respect of the loans for the same purpose advanced by the employer on the maximum outstanding monthly balance as reduced by interest actually paid by employee or member of his household. However, perquisite value for loans (net of amount reimbursed under medical insurance scheme) given for medical treatment of specified disease or petty loans up to Rs. 20,000 is not taxable.  

2. Use of movable assets  

Value of benefit shall be 10% p.a. of the actual cost of asset or the rent charges paid by the employer as reduced by amount paid by the employee.  

3. Transfer of movable assets  

Value of benefit on transfer of movable asset shall be the actual cost of the asset to the employer as reduced by the amount calculated at 10% of such cost for each completed year of use by the employer and further reduced by the payments made by the employee. The normal wear and tear would be computed at 50% in case of computers and electronic items, and 20% in case of motor cars on the reducing balance method.

Movable Asset	Taxable Value*
Computers & *Electronic items	Actual cost to employer- depreciation @ 50% as per WDV method.
Cars	Actual cost to employer- depreciation @ 20% as per WDV method.
Any other movable Asset	Actual cost to employer- depreciation @ 10% as per Straight Line Method
* Electronic items does not include household appliances (i.e., white goods) like washing machines, microwave ovens, mixers, hot plates, ovens etc.	* Amount, if any, paid or  recovered from employee being the consideration for such transfer, is reduced in order to find the taxable value.

4. Other benefits, amenity, etc.  

Value would be on the basis of cost to the employer under an arm’s length transaction as reduced by the employee’s contribution.

DEDUCTIONS FROM SALARY (SECTION 16)

1. Entertainment Allowance [Section 16(ii)]  

Only for Government Employees (least of following is exempt)

1. Rs. 5000 or  

2. 20% of Basic Salary, or  

3. Actual  

2. Tax on Employment [Section 16(iii)]  

1. Any sum paid by employee..

2. If employer pays such tax on behalf of employee, it is treated as perquisite u/s 17(2)(iv) and then deduction is allowed from the gross salary income.