CHAPTER I

INTRODUCTION
Under

the

Constitution

of

India

Central

Government is empowered to levy tax on the income.

Accordingly, the Central Government has enacted the
Income Tax Act, 1961. The Act provides for the scope and
machinery for levy of Income Tax in India. The Act is
supported by Income Tax Rules, 1961 and several other
subordinate and regulations. Besides, circulars and
notifications are issued by the Central Board of Direct
Taxes (CBDT) and sometimes by the Ministry of Finance,
Government of India dealing with various aspects of the
levy of Income tax. Unless otherwise stated, references to
the sections will be the reference to the sections of the
Income Tax Act, 1961. Income tax is a tax on the total
income of a person called the assessee of the previous year
relevant to the assessment year at the rates prescribed in the
relevant Finance Act.
Some of the important definitions under Income Tax Act,
1961 are as follows:

ASSESSMENT YEAR S. 2(9)

Section 2(9) defines an Assessment year as the period
of twelve months starting from the first day of April every
year. An assessment year begins on 1st April every year
and ends on 31st March of the next year. For example,
Assessment year 2012-13 means the period of one year
beginning on 1 st April, 2011 and ending on 31st March,
2012. In an assessment year, income of the assessee during
the previous year is taxed at the rates prescribed by the
relevant Finance Act. It is therefore, also called as the Tax
Year
PREVIOUS YEAR- S. 2(34) & S. 3
Section 3 defines Previous year as the financial
year immediately preceding the assessment year. Income
earned in one financial year is taxed in the next financial
year. The year in which income is earned is called the
previous year and the year in which it is taxed is called
the assessment year Common previous year for all
source of income:
A person may earn income from more than one
sources but previous year will always be common for all

the sources of income. This will be so even if a person

maintains records or books of accounts separately for
different sources of income.
Total income of a person from all the sources of income
will be taken together and considered in the previous year
or the financial year immediately preceding the assessment
year.
PERSON Section 2(31)
The term person includes:
a.
b.
c.
d.
e.

an individual;
a Hindu undivided family (HUF);
a company;
a firm;
an Association of Persons(AoP) or a Body of

Individuals,(BoI) whether incorporated or not;

f. a local authority; and every artificial juridical
person not falling within any of the preceding
categories.
These are seven categories of persons chargeable to tax
under the Act. The aforesaid definition is inclusive and not
exhaustive. Therefore, any person, not falling in the
abovementioned seven categories, may still fall within the
four corners of the term person and accordingly may be
liable to tax.

ASSESSEES. 2(7)
U/s 2(7) Assessee means a person by whom
income tax or any other sum of money is payable under the
Act and it includes:
a. every person in respect of whom any proceeding under
the Act has been taken for the assessment of his income or
loss or the amount of refund due to him
b. a person who is assessable in respect of income or loss
of another person or who is deemed to be an assessee, or
c. an assessee in default under any provision of the Act
A minor child is treated as a separate assessee in respect of
any income generated out of activities performed by him
like singing in radio jingles, acting in films, tuition income,
delivering newspapers, etc. However, income from
investments, capital gains on securities held by minor
child, etc. would be taxable in the hands of the parent
having the higher income (mostly the father), unless if such
assets have been acquired from the minors sources of
income.
ASSESSMENT - S 2(8)

An assessment is the procedure to determine the

taxable income of an assessee and the tax payable by him.
S. 2(8) of the Income Tax Act, 1961 gives an inclusive
definition

of

assessment

an

assessment

includes

reassessment U/s 139 of the Act, every assessee is

required to file a self declaration of his income and tax
payable by him called return of income.
INCOME- S 2(24)
Although, income tax is a tax on income, the Act
does not provide any exhaustive definition of the term
Income. Instead, the term income has been defined in
its widest sense by giving an inclusive definition. It
includes not only the income in its natural and general
sense but also incomes specified in section 2 (24).
Broadly the term Income includes the following:
i. profits and gains ;
ii. dividend;
iii. voluntary contributions received by certain institutions

iv. Receipts by employees the value of any benefit or

perquisite, whether convertible into money or not.
vi. Incomes from business s-28
vii. any capital gains chargeable under section 45;
viii. any sum earlier allowed as deduction and chargeable
to income-tax under Section 59
ix. any winnings from lotteries, crossword puzzles, races
including horse races, card games and other games of any
sort or from gambling or betting of any form or nature
whatsoever ;
x. any contribution received from employees towards any
provident fund or superannuation fund or Employees State
Insurance Act, 1948 , or any other fund for the welfare of
such employees ;
xi. any sum received under a Keyman insurance policy
including the sum allocated by way of bonus on such
policy.
xii. any sum of money or value of property received as gift
S 56(2) and Shares of closely held companies transferred

to another company or firm are covered in the definition of

gift except in the case of transfer of such shares for
reorganization of business by amalgamation or demerger
etc.
income shall be classified under the following heads of
income:I.
II.
III.

INCOME FROM SALARY

INCOME FROM HOUSE PROPERTY
INCOME
FROM
BUSINESS

IV.
V.

PROFESSION
INCOME FROM CAPITAL GAINS
INCOM E FROM OTHER SPOOURCES

OR

Salary, as commonly understood, means a fixed

payment made periodically as compensation for regular
services rendered. It covers wages paid for manual work,
salary paid for clerical jobs and remuneration paid to
executives and managers. Salary is determined by market
pay rates for people doing similar work in similar
industries in the same region. Salary is also determined by
the pay rates and salary ranges established by an individual
employer. Salary is also affected by the number of people
available to perform the specific job in the employer's
employment locale.

Salary is computed, one must have answers to the

following questions

Who are the persons liable to pay tax on salaries?

When the Salary taxable- on accrual or on receipt?
What is the place of accrual for salary income?
How is salary computed? Which items are included,
which items are exempt and what are the
deductions available?
Salary is the remuneration

paid by an employer to his employee for the services

rendered & an individual can only earn salary as an
individual can only render services. Any individual who
receives remuneration is liable to pay tax on his income
from salary. The individual must be working in any
company, can be full time or part time.
The remuneration received by the director is also taxable
under the head Salary.
Any salary, bonus, commission or remuneration due to or
received by a partner is not considered as salary & such
amount is taxable under the head profit from business.

CHAPTER II

HEADS OF INCOME : AN OVERVIEW

Income tax is payable by an assessee on his total
income from all the source of income. Each source has its
own unique features and requires specific treatment for
correct computation of income from that particular source.
Naturally, rules and method for computation of income
from each such source are different according to the nature
of the source.
Income tax is an annual tax on income. The Indian
Income Tax Act (Section 4) provides that in respect of the
total income of the previous year of every person, income
tax shall be charged for the corresponding assessment year
at the rates laid down by the Finance Act for that
assessment year. Section 14 of the Income-tax Act further
provides that for the purpose of charge of income tax and
computation of total income all income shall be classified
under the following heads of income:
A.
B.
C.
D.
E.

Salaries
Income from house property
Profits and gains of business or profession.
Capital gain.
Income from other sources.

The total income from all the above heads of income

is calculated in accordance with the provisions of the Act
as they stand on the first day of April of any assessment
year.
An income belonging to a specific head must be
computed under that head only. If an income cannot be
placed under any of the first four heads, it will be taxed
under the head Income from other sources. Moreover,
certain expenses incurred in earning incomes under each
head are allowed to be deducted from its gross income
according to the provisions applicable to that specific head.
Then, the net income under various heads is aggregated
together to compute gross total income of the person. After
making certain deductions which are allowed from gross
total income we arrive at the figure of total income for
taxation purpose.

TAX ON AGGREGATE INCOME UNDER ALL THE HEADS

Although the income is computed under five

different heads of income, tax will be computed on the
aggregate or total income from all the sources taken
together at the prescribed rates. However, different tax

10

treatment is given to different items. For instance, Long

term Capital gains (LTCG) are generally taxed at 20%. But
LTCG on listed securities is exempt from tax. Similarly,
short term capital gain on sale of equity shares is taxed at
15%. The amount of such short term capital gains would be
deducted from the aggregate total income and accordingly
tax rates are applied. Similarly, shipping companies are
taxed on the basis of tonnage of the shipping fleet.
Lotteries, horse races etc are taxed at the maximum rate of
tax @ 30%. All such incomes are excluded and tax is
computed on rest of the total income.
COMMON RESIDENTIAL STATUS FOR ALL THE HEADS

S. 6 provides that where a person is resident for the

purpose of any particular head of income, he will also be
considered as resident for the purposes of computation of
income under all the heads of income.

SEPARATE SOURCES OF INCOME UNDER ONE HEAD.

Income is classified for each head of income. That

head of income may have different sources of income
falling under that head. For instance a person may be in
receipt of his salary from more than one employer or rent

11

from two or more house properties or more than one

business. All such sources will be clubbed together to
arrive at the income from that head.

12

CHAPTER

III

INCOME FROM SALARY

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

13

Basic elements of salary

Payer and payee must have employer and employee
relationship.
Any payment received by an individual from a
person other than his employer cannot be termed as
salary.

Basis of charge
Salary is chargeable to tax on due or on receipt
basis whichever is earlier;
Salary received in advance is taxable in the year of
receipt. Such salary not be included again in the
total income when it become due;
Outstanding salary is taxable on due basis i.e. salary
is taxable in the year in which it falls due.
Arrear salary is taxable on receipt basis.

14

Definition of salary
As per section 17 (1) of the Income Tax, Salary includes:
i) wages.
(ii) Any annuity or pension
(iii) Any gratuity;
(iv) Any fees, commissions, perquisites or profits in lieu of
or in addition

to any salary or wages.

(v) Any advance of salary

(vi) Any payment received by an employee in respect of
any period of leave

not availed of by him

(vi) The annual accretion to the balance at the credit of an

employee

participating in a recognized provident fund, to

the extent to which it is chargeable to tax under rule 6 of

Part A of the Fourth Schedule; and
(vii) The aggregate of all sums that are comprised in the
transferred balance as referred to in sub-rule (2) of rule 11
of Part A of the Fourth Schedule of an employee
participating in a recognized provident fund, to the extent
to which it is chargeable to tax under sub-rule (4) thereof;
(viii) The contribution made by the Central
Government [or any other employer] in the previous year,
to the account of an employee under a pension scheme
referred to in section 80CCD;
15

The following deductions from salary income are

admissible as per Section 16 of the Income-tax Act.
(i) Professional/Employment tax levied by the State
Govt.
(ii) Entertainment Allowance- Deduction in respect of this
is available to a government employee to the extent of
Rs. 5000/- or 20% of his salary or actual amount
received, whichever is less.
ESSENTIAL CHARACTERISTICS OF SALARIES
Followings are the essential characteristics of
taxable salary,
Employer-Employee Relationship:
There must be relation of employer and employee
between the payer of income and receiver of income.
Remuneration received in any other capacity will not be
treated as salary. Thus for instance, salary of a Member of
Parliament cannot be specified as salary, since it is received
from Government of India which is not his employer.
Compensation for services rendered:

16

The payment must be made to an employee by the

employer as compensation for the services rendered by the
employee. However, payment made in other forms like
gift, perquisites are also included in the definition of the
term salary.

Name not important:

Salary may be called as such by whatever name.
There is no difference between salary and wages so long as
the relationship between the payer and payee is that of
employer and employee and the payment is made as a
compensation for the services rendered by the employee.
More than One Sources:
Salary may be from more than one employer.
Type of Employment:
Salary may be in any capacity like part-time
employment or full time employment.
Past, Present and prospective employer

17

Salary may be received from not just the present

employer but also a prospective employer and in some
cases even from a former employer for example pension
received from a former employer.
Real intention to pay:
Salary income must be real and not fictitious. There
must exist an intention/ obligation to pay and `receive
salary.
Subsequent Surrender of Salary not taxfree:
Salary is taxed on due basis. A subsequent surrender
of the salary will not be tax-free except where an employee
surrenders his salary to the central government, and then
the salary so surrendered will not be treated as taxable
income of the employee.
Tax- Free salary:
Salary paid tax free is also taxable in the hands of
the employee, though contractually income tax on such is
borne not by the employee but by the employer.
Time of taxability:

18

Salary is taxable in the year of receipt or in the year

of earning or accrual of the salary income, whichever is
earlier. In other words advance salary will be taxed when
received and unpaid salary will be taxed on accrual i.e. if
the salary has been received first, then it will be taxable in
the year of receipt. If it has been earned first but not yet
received then it will be taxable in the year of earning.
However, salary once taxed shall not be subjected to tax
again .Accordingly accounting method employed by the
employee is not relevant to determine the taxability of
salary.
Salary received by individuals only:
Salary is a compensation for personalized services,
which can obviously be rendered by a normal human being
and not a body corporate. Salary income is taxable in the
hands of individuals only. No other type of person such as
a firm or HUF, companies can earn salary income.
Voluntary payments taxable as salary:
Voluntary payments like gift etc also form the part
of taxable salary.

19

 Salary in respect of services rendered in

India:
Salary, leave salary and pension even if paid outside
India are deemed u/s 9 to accrue and arise in India and are
taxable in India. Further, Salary paid to Indian diplomats
by the Government of India is deemed to accrue and arise
in India although the same is exempted e u/s 10.

Gross salary Taxable:

Compulsory deductions from salary such as
employees contribution to provident fund, deduction on
account of medical scheme or staff welfare scheme etc. are
examples of instances of application of income. In these
cases, for computing total income, these deductions have to
be added back.

Perquisites- Section 17 (2)

Perquisite is additional benefit received by an
employee over & above his basic salary but it is different

20

from allowance. Perquisite may be paid voluntarily or by

virtue of service contract.
Perquisites taxable in case of all employees.
Perquisites taxable only in case of specified
employees like directors etc.
Perquisites not taxable at all
Perquisites Taxable in case of All Employees:
Under Section 17 (2) Perquisites includes:The following perquisites are taxable in case of
every employee, whether specified or not:
1. Rent free house provided by employer
2. House provided at concessional rate
3. Any obligation of employee discharged

by

employer e.g. payment of club or hotel bills of

employee, salary to domestic servants engaged by
employee, payment of school fees of employees
children etc.
4. Any sum paid by employer in respect of insurance
premia on the life of employee
5. Notified fringe benefits (on which fringe benefit tax
is not applicable) it includes interest free or
concessional loans to employees, use of movable
assets, transfer of moveable assets.
Perquisites taxable only for specified employees:
1. Services of a sweeper, a gardener, a watchman or a
personal attendant provided by an employer to an

21

employee without charge or with nominal charge if

domestic servant is engaged by employer and salary
is paid by employer.
2. Supply of gas, electric energy or water for
household consumption of employee without any
charge or with nominal charge if connection is in
the name of employer and bills are paid by
employer
3. Education facility to any household members of the
employee without any charge or with nominal
charge if bills are issued in the name of & paid by
employer.
4. Any medical facility in India provided to an
employee or any member of his family if bills are in
the name of employer and paid or reimbursed by
employer in excess of ` 15,000 per assessment year.
5. Car or any other automotive conveyance.
6. Transport facility by a transport undertaking (not
being provided by railways or by an airline).
Perquisites not taxable in all cases:
1. Rentfree furnished or unfurnished accommodation
in cases mentioned below:
a) Rent freeaccommodation given in a remote area.
b) A temporary accommodation of 800 sq. ft given at
mining site, etc.

22

c) Hotel accommodation given after transfer for not

exceeding 15 days
d) Rentfree official accommodation provided to a
Judge of High Court or Supreme Court or an
official of Parliament or a Union Minister and a
Leader of opposition in Parliament.
2. Leave travel concession to employees subject to
provision of section 10(5)
3. Providing use of computer & laptop to an employee
or any member of his household.
4. Providing medical facilities to an employee or any
member of his family:
a) in a hospital maintained by the Government or any
local authority or approved by the Government for
the medical treatment of Government employees.
b) in a hospital maintained by the employer.
c) in respect of prescribed diseases or ailments, in any
hospital approved by the Chief Commissioner
having regard to the prescribed guidelines.
5. Health insurance premium of the employee or any
member of his household paid by the employer
6. Any other medical facility in India provided to an
employee or any member of his family
7. Bills are in the name of employer and paid or
reimbursed by employer up to ` 15,000 per
assessment year

23

8. Bills are in the name of employee and paid or

reimbursed by employer up to ` 15,000 per
assessment year
9. Medical facility outside India if a few conditions
are satisfied
10. Any perquisite other than taxable perquisites
already mentioned (few examples are car, holiday
home, club, free tea / refreshment / lunch, gift, etc.)
Valuation of Perquisites:
The rules relating to valuation of such benefits & amenities
have been mentioned in rule 3. They are as under.

Accommodation:
For the purpose of valuation of house, employees are
divided into 2 categories:
a) Central and State Government employees: If
accommodation is provided by the State or Central
Government to their employees, the value of such
accommodation is simply the amount fixed by the
government (called the license fees) in this regard.
b) Other Employees: The valuation of accommodation
for this category of non government employees
depends upon whether the accommodation given to

24

the employee is owned by the employer or taken on

lease.
Accommodation owned by employer
The value of accommodation is:
i. 20% of salary in cities having
population exceeding four lakhs as
ii.

per 1991 census.

15% of salary in other cities in
respect of the period for which the
accommodation was occupied by the

employee during the previous year.

Accommodation is taken on lease / rent by
the employer:
i. The value of such accommodation is
actual amount of lease rental paid or
payable by the employer or 20% of
salary, whichever is lower.

Salary: For the purpose of valuation of perquisites in

respect of rent free accommodation, salary includes

Basic Salary
DA
Bonus
Commission
Fees
All other taxable allowances
Any monetary payment

Hotel Accommodation:
25

If accommodation is provided in Hotel the value of

the benefit in such a case shall be 24% of the annual salary
or the actual charges paid or payable to such hotel,
whichever is lower.
Employer may provide accommodation facility to the
employee with or with furniture. Such accommodation may
be rent free at a concessional rent.
a) For Rent free Accommodation
The amount taxable for such perquisite is as follows:

26

Type
of
employee

Taxable amt for

unfurnished
accommodation
(1)

Taxable amt
to be added if
furniture is
provided
(2)

Taxable amt for

furnished
accommodation
(3)

a.
Governmen
t
employees

Amt payable as
per Govt. rules

10%
per
annum
of
cost
of
furniture or
rent payable

(1) Plus (2)

10%
per
annum
of
cost
of
furniture or
rent payable.

(1) Plus (2)

b. Non - Government employees:

If house is
owned by
the
employer

If house is
not owned
by
the
employed

15% of
salary if
populati
on
exceeds
25
lakhs.

10% of
salary if
populati
on
is
between
10 to 25
lakhs.

7.5% of
salary if
populati
on
is
below
10
lakhs.

15% of salary or
lease
rent,
whichever
is
lower

10%
per
annum
of
cost
of
furniture or
rent payable

27

(1) Plus (2)

Car Facility
Motor car facility provided by an employer is taxable
in the hands of the employee on the
following basis.

Car is
owned by

Car is
maintained
by

Used by
employees for

Taxable Value

Person
chargeable

Official purpose

Not a Perquisite

Not applicable

Personal Purpose

Maintenance +
10%
Depreciation

Specified
Employee

Both Purpose

Rs. 1,800 /Rs.

2,400 p.m

Official purpose

Not a Perquisite

Personal Purpose

Hire charges of
the car /10%
depreciation

Both Purpose

Rs.600/900 p.m

Official purpose

Not a Perquisite

Personal Purpose

Maintenance

Both Purpose

Actual
expenditure
incurred - Rs
1,800 /2,400+
(Rs 900p.m. for
driver, if any)

Any Purpose

Not a Perquisite

Employer

Employer

Employee

Employee

Employer

Employee

Gas, Electricity & Water:

28

Not applicable

Specified
Employee

Not applicable
Specified
Employee

Not applicable

The value of these benefits is taxable in the hands of

specified employees, if the connection is taken in the name
of the employer, and is determined according to the
following rules:
If the employer provides the supply of gas,
electricity, and water from its own sources, the
manufacturing cost per unit incurred by the
employer shall be the value of perquisite.
If the supply is from any other outside agency, the
value of perquisite shall be the amount paid by the
employer to the agency supplying these facilities.
Where the employee is paying any amount in
respect of such services, the amount so paid shall be
deducted from the value of perquisite calculated
under (a) or (b).
Where the connection for gas, electricity, water
supply is in the name of employee and the bills are
paid or reimbursed by the employer, it is an
obligation of the employee discharged by the
employer. Such payment is taxable in case of all
employees under Section 17 (2) (IV).
Employer may also provide gas, electricity or water supply
to the employee either free of cost or
price.
Following will be the taxable amount.

29

at concessional

Situations (1)

If employer
provides the
above free of cost
(2)

If employer provides
the above at a
concessional rate (3)

If the employer
purchases it from
outside:

Cost incurred by
the employer to
provide the same

Column (2) - amount

recovered from the
employee.

if the employer
provides it from
its own source:

Manufacturing
cost per unit

Column (2) - amount

recovered from the
employee.

Free or Concessional Education:

a) Cost of free education to any member of
employees family provided in an educational
institution owned and maintained by the employer
shall be determined with reference to reasonable
cost of such education in a similar institution in a
near by locality. For education facilities provided to
the children of employee, the value shall be nil, if
the cost of such education per child does not exceed
Rs.1, 000 per month.
b) Where free education facilities are allowed to any
member of employees family in any other
educational institution by reason of his being in

30

employment of that employer, the value of

perquisite shall be determined as in (a).
c) In any other case: The value of benefit of providing
free or concessional educational facilities for any
member of the house hold (including children) of
the employee shall be the amount of expenditure
incurred by the employer.
d) While calculating the amount of perquisite in all in
above cases, any amount paid or recovered from the
employee in this connection, shall be deducted.

Interest Free or Concessional Loans:

The employees working or any family member in
financial institutions get this facility. The value of
perquisites arising from such loans would be the excess of
interest payable at prescribed interest rate over interest.
Use of Assets:
It is common practice for an asset owned by the employer
to be used by the employee. This perquisite is to be charged
at the rate of 10% of the original cost of the asset as
reduced by any charges recovered from the employee fro

31

such use. However, the use of computers & laptops would

not give rise any perquisites.

Section 17 (3) Profits in Lieu of Salary

It is not a regular payment received from the employer. It is
received instead of salary.
It includes:
1. The amount of any compensation due to or received
by an assessee from his employer or former
employer at or in connection with the termination
of his employment or the modification of the terms
and conditions relating there to;
2. Any payment other than any payment referred to in
clause (10) (clause (10 A)) (Clause (10B), Clause
(11) Clause (12) Clause (13) or clause (13A) of
section 10, due to or received by an assessee from
an employer or a former employer or from
provident fund or other fund, to the extent to which
it does not consist of contributions by the assessee
or interest on such contributions;
3. Any sum received under a Keyman insurance
policy including the sum allocated by way of bonus
on such policy.

32

4. Any amount due to or received, whether in lump

sum or otherwise, by an assessee from any person
a) Before his joining any employment with that
person, or
b) After termination of his employment with that
person.

ALLOWANCES
Allowance is defined as a fixed quantity of money or
other substance given regularly in addition to salary for
meeting specific requirements of the employees. As a
general rule, all allowances are to be included in the total
income unless specifically exempted. Exemption in respect
of following allowances is allowable to the extent
mentioned against each :-

House Rent Allowance

Provided that expenditure on rent is actually
incurred, exemption available shall be the least of
the following :
(i) HRA received.
(ii) Rent paid less 10% of salary.

33

(iii)

40% of Salary (50% in case of Mumbai,

Chennai, Kolkata, Delhi) Salary here means
Basic + Dearness Allowance, if dearness
allowance is provided by the terms of
employment.

Leave Travel Allowance

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

34

.Certain allowances given by the employer to the employee are exempt u/s 10(14). All

these exempt allowance are detailed in Rule 2BB of Income-tax Rules and are briefly
given below:
For the purpose of Section 10(14)(i), following allowances are exempt, subject to
actual expenses incurred:
(i) Allowance granted to meet cost of travel on tour or on transfer.
(ii) Allowance granted on tour or journey in connection with transfer to meet the daily
charges incurred by the employee.
(iii)

Allowance granted to meet conveyance expenses incurred in performance of

duty, provided no free conveyance is provided.

(iv)Allowance granted to meet expenses incurred on a helper engaged for

performance of official duty.
(v) Academic, research or training allowance granted in educational or research
institutions.
(vi)Allowance granted to meet expenditure on purchase/ maintenance of uniform for
performance of official duty.

EXEMPTION FROM SALARY

There are various exemptions under the income tax act. They are as follows:

Leave Travel Concessions

Gratuity
Encashment of Leave Salary
Retrenchment Compensation
Retirement Compensation to Employees
Tax on Perquisites Paid by Employer
Payment from Statutory/ Public PF
Payment from Recognized PF
House Rent Allowance
Payment from Superannuation
Pensions to Gallantry Award Winners

Leave Travel Concession [S.10(5)]

It is exempted to the following extent:

In case of an individual,
The value of any travel concession or assistance received by or due to him,
From his employer for himself & his family, in connection with his proceeding

on leave to any place in India.

Or, from his employer or former employer for himself and his family, for
proceeding to any place in India after retirement from service or after the

termination of his service,

Subject to the conditions prescribed as to the number of journeys and the
amount exempt per head.

Family of an individual includes: His spouse & children, his parents, brothers & sisters
who are dependent on the individual.
Rules prescribed:
Different Situations
Where journey is performed by air

Amount of Exemption
Amount of air economy fare of the National
Carrier by the shortest route or the amount spent,

Where journey is performed by rail

whichever is less.
Amount of air-conditioned first class rail fare by
the shortest route or the amount spent, whichever

Where the places of origin of journey and

is less.
Amount of air-conditioned first class rail fare by

destination are connected by rail and journey is

the shortest route or the amount spent, whichever

performed by any other mode of transport

Where the places of origin of journey and

is less
First class or deluxe class fare by the shortest

destination or part thereof) are not connected by

route or the amount spent, which ever is less.

rail.

Air conditioned first class rail fare by the shortest

route (as if the journey had been performed by

Where a recognized public transport exists.

rail) or the amount actually spent, whichever is

Where no recognized public transport system

less.

exists.

Other Points:
Only 2 journeys in a block of 4 years is exempt- Exemption on the aforesaid basis is
available in respect of 2 journeys performed in a block of four calendar years
commencing from 1987. The current block 2003-2006 runs from January 1, 2011 to
December 31, 2014.

Carry-over concession- Any un-availed travel concession(s) during a particular block

can be claimed in the first calendar year of the next block (but in respect of only one
journey).

Gratuity:
Gratuity is lump-sum amount paid to an employee, on the basis of the duration of
his employment, on termination of service due to retirement, resignation, death etc. It is
exempt from tax, either fully or partly, depending on the type of employee receiving it.
Gratuity received while still in service is not exempt; it is taxable as salary.

a)
b)
c)
d)
e)
f)

Gratuity to Government Employees:

Any death-cum-retirement gratuity received underThe revised pension rules of the central government,
The central civil services (Pension) Rules, 1972,
Any similar scheme applicable toThe members of civil services of the union,
Holders of defence or civil posts under the union,
The members of the All India Services,
The members of the civil services of a state,
Holders of civil posts under a state,
The employees of a Local Authority; and
Any retirement gratuity under the Pension Code or Regulations applicable to
the members of the members of the defence services,

Is wholly exempt from tax. In short, the gratuity received by any employee of the
Central State Government(s), Union, Local Authority or the defence services is entirely
exempt from tax.
Gratuity Under Payment of Gratuity Act, 1972
1. A person working in any factory, mine, oil field, plantation, port, railways , &
shop or establishment is covered under the Payment of Gratuity Act, 1972.
2. Any gratuity received by such person is exempt from tax, to the extent of the
least of the following amounts:
o Gratuity actually received
o Rs. 10,00,000, being the notified limit;
o Salary last drawn x 15 days/ 26 days x no of completed years

It should be noted that-

I.

Basically, gratuity is equal to 15 days salary, for every completed year of

II.
III.
IV.

service.
In case of a seasonal establishment, 7 days salary is taken instead of 15 days;
26 days refer to the working days per month;
Salary includes Basic + Dearness Allowance, but excludes bonus, commission,
other allowances, over time, etc.

Gratuity to any other Employee

1. Any other gratuity receivedo By an employee on retirement, his becoming incapacitated before his
retirement or termination of his employment, including by resignation;
o
o
o
o
o

or
By his widow, children or dependent, on his death,
To the extent of the least of the following amounts is exempt from taxGratuity actually received during previous year;
Sum notified by the Government (Rs.10,00,000 at present);
Half months salary for each completed year of service, on the basis of
the average salary for the 10 months immediately preceding the month
of retirement.

2. If an employee receives gratuities from more than one employer, in the same
previous year, the total exemption cannot exceed the limit notified by the
Government.
3. Similarly, the notified ceiling applies to any gratuity received and exempted in
any earlier previous years by the employee. Any such gratuity exempted earlier
shall be reduced from the ceiling amount of Rs. 10,00,000, and only the balance
can be claimed, subsequently.
4. Salary for this clause, includes basic salary, dearness allowance and
commission at fixed percentage on turnover achieved by employee.
5. Completed years of service means only completed years; part of year, even if
more than 6 months is to be ignored & not rounded off.
6. Note that while the gratuity under this clause is calculated on the basis of the
average salary for last 10 months, gratuity under Payment of Gratuity Act, 1972
is calculated on the basis of last salary drawn.

Commutation of Pension:
Pension is the monthly payment by the e-employer to a retired employee which is taxed
as salary. An employee may opt to get a one time lump sum payment in lieu of such

monthly payments. This is known as commutation of pension, which is exempt fully or

partly depending on the category of the employee, as explained below.
Government Employees:
A payment in commutation of pension is fully exempt, if received under

The civil Pensions (Commutations) rules of the central government,

A similar scheme applicable to members of civil services of the Union, holders

of defence or civil posts under the union,

Members of all India Services, defence services, State civil services,
Holders of civil posts under a State,
Employees of a local authority or statutory corporation.

Other Employees:
Any payment in commutation of pension received under any scheme of any other
employer is exempt to the extent, it does not exceed

Where the employee receives any gratuity, the commuted value of 1/3 of the

pension which he is normally entitled to receive.

In any other case, the commuted value of of such pension.

Encashment of Leave Salary:

Leave encashment means cash received by an employee against leave earned but not
taken and accumulated. Leave encashment while in service is taxable. Leave
encashment on leaving a job is exempt as explained below.
Government Employees:
Any payment received by an employee of the Central Government or State
Government as the encashment of the earned leave to his credit at the time of his
retirement, is wholly exempt from tax.
Other Employees:
In case of non-Government employees, leave salary is exempt to the extent of the least
of the following amounts-

1. Encashment of the earned leave, not exceeding 30 days per each completed
year of service with the employer from whose services he is retiring, standing to
the credit of the employee at the time of retirement;
2. 10 months average salary, on the basis of the salary drawn for the 10 months
immediately preceding the date of retirement;
3. The amount notified by the government
4. The amount actually received.

Retrenchment Compensation:
Conditions:
1. any compensation received by a workman under the Industrial Disputes Act,
1947 (14 of 1947 ), or under any other Act or Rules, orders or notifications
issued there under or under any standing orders or under any award, contract of
service or otherwise,
2. at the time of his retrenchment (dismissal from job), or
the closing down of the undertaking in which he is employed, or
the transfer of services of the workman due to change in the
management or ownership of the undertaking, if his service is
interrupted due to such transfer or his new service conditions are less
favourable or the new employer is not liable to pay retrenchment
compensation in respect of the earlier period of service;
3. Limited upto the amount Calculated u/s 25F(b) the Industrial Disputes Act, or
Notified by the Central Government, whichever is less;
4. Except that no limit is applicable in respect of any compensation received under
a scheme approved by the Central Government.
Amount of Exemption:
The amount is the least of the following:
1. Amount calculated at 15 days average pay for every completed year of
continuous service or any part thereof in excess of 6 months. Month for this
purpose should be taken as 26 days.
2. Rs. 5,00,000.
3. Retrenchment compensation actually received

Retirement Compensation to Employees

1.
2.

3.
4.
5.
6.

Any amount received or receivable as compensation,

By an employee ofA public sector
Any other company
An authority established under a central, state or provincial act,
A local authority
A co-operative society
A statutory or recognized institution
A notified Institute of Management
State Government
The Centrel Government
A notified institution having importance throughout India or any state
An Indian Institute of Technology.
On his voluntary retirement
Under any scheme framed as per the prescribed guidelines;
Is exempt upto Rs. 5 Lakhs,
Provided that no such exemption was allowed to the assessee in any earlier
assessment year and no relief has been allowed u/s 89

Tax on Perquisites Paid by Employer

1.
2.
3.
4.
5.
6.
7.

In the case of an employee, being an individual

Deriving income by way of non-monetary perquisites
The tax on whole or part of such income
Actually paid by his employer, at the option of the employer
On behalf of such employee
Shall be exmpt from tax
Not withstanding anything contained in section 200 of the Companies Act, 1956

Such tax paid cannot be claimed as business expenditure by the employer, as provided
in S. 40(a)(vi)

Payment from Statutory/ Public PF:

This exemption is in respect ofAny payment to a member from,
A Provident Fund to which the PF Act, 1925 applies,
Or from any other PF setup & notified by the Central Government.
Payment from Recognized PF

This exemption pertains to1. The accumulated balance due to becoming payable,
2. To any employee participating in a recognized provident fund,
3. To the extent provided in rule 8 of part A of the 4th Schedule to the Act.

House Rent Allowance

House rent allowance (HRA) is received by the salaried class. A deduction is
permissible under Section 10(13A) of the Income Tax Act, in accordance with Rule 2A
of the Income Tax Rules. You can claim exemption on your HRA under the Income Tax
Act if you stay in a rented house and get a HRA from your employer.

The HRA deduction is based on salary, HRA received, the actual rent paid and place of
residence. The place of residence is important. For Mumbai, Kolkata, Delhi or
Chennai, the tax exemption on HRA is 50 percent of the basic salary, while for other
cities it is 40 percent of the basic salary.

House rent allowance (HRA) is received by the salaried class. A deduction is

permissible under Section 10(13A) of the Income Tax Act, in accordance with Rule 2A
of the Income Tax Rules. You can claim exemption on your HRA under the Income Tax
Act if you stay in a rented house and get a HRA from your employer.
The HRA deduction is based on salary, HRA received, the actual rent paid and place of
residence. The place of residence is important. For Mumbai, Kolkata, Delhi or
Chennai, the tax exemption on HRA is 50 percent of the basic salary, while for other
cities it is 40 percent of the basic salary.

The city of residence is to be considered for calculating HRA deduction.

The least value of these is allowed as tax exemption on HRA:

Actual rent allowance the employer provides as part of salary in the relevant period
during which the rental accommodation was occupied Actual rent paid for the house,
less 10 per cent of basic pay 50 percent of basic salary if you reside in Mumbai,
Calcutta, Delhi or Chennai, or 40 per cent if you reside in other cities.
In order to claim the exemption, the rent must actually be paid for the rented premises
which you occupy.
Also, the rented premises must not be owned by you. As long as the rented house is not
owned by you, the exemption of HRA will be available up to the limits specified.
For the purpose of this deduction, salary means basic salary and includes dearness
allowance, if the terms of employment provide it, and commission based on a fixed
percentage of turnover achieved by the employee.
The deduction is available only for the period during which the rented house is
occupied by the employee and not for any period after that. It is to be noted that the tax
benefits for home loans and HRA are two separate aspects.
In case you are paying rent for an accommodation, you can claim tax benefits on the
HRA component of your salary, while also availing tax benefits on a home loan.
You need to submit proof of rent paid through rent receipts, duly signed and stamped,
along with other details such as the rented residence address, name of the owner, period
of rent etc.
How it applies:-For example, assume one earns a basic salary of Rs 20,000 per month
and rents a flat in Mumbai for Rs 5,000 per month. His actual HRA is Rs 8,000. He is
eligible for 50 percent of the basic pay for HRA exemption.
Least of:
o

Actual HRA received Rs 8,000

50 percent of basic salary Rs 10,000

Excess of rent paid over 10 percent of salary, i.e., Rs 5,000 less Rs 2,000 Rs
3,000.

As such, Rs 3,000 per month is the least and will be the exemption allowable for HRA
deduction.

DEDUCTIONS FROM SALARY

PARTICULARS

Rs.

DEDUCTIONS UNDER CHAPTER VI A

1. SECTION 80C
Life insurance premium
Deferred annuity
Deferred annuity by government
Contribution to statutory P.F
Contribution to P.P.F
Contribution to recognized P.F
National saving scheme
National savings certificates
Unit linked insurance plan
P.O cumulative time deposits
Pension fund of UTI
Housing finance deposits
New house
Tuition fees
Infrastructure debentures
Bank fixed deposits
NABARD bonds
P.O. 5 year time deposit____________________
2. Section 80D : medical insurance
Self, spouse, dependent children
Parents
Additional ( senior citizen)

XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX

15000
15000
5000______

3. Section 80DD maintenance of handicapped ( Rs.

50000 to Rs. 100000)
4. Section 80DDB medical treatment (40000 to 60000)
5. Section 80E interest on higher education loan
6. Section 80U blind/handicapped/retarded ( lump sum)
( 50000 or 100000)

XX
XX
XX
XX
XX

TOTAL DEDUCTIONS
XXXX

CHAPTER IV

FINDINGS AND CONCLUSIONS

FINDINGS

Income tax is an annual tax on income. The Indian Income Tax Act (Section 4)
provides that in respect of the total income of the previous year of every person,
income tax shall be charged for the corresponding assessment year at the rates

laid down by the Finance Act for that assessment year.

all income shall be classified under the following heads of income: Salaries,
Income from house property, Profits and gains of business or profession,
Capital gains& Income from other sources.

The employee or individual who earn salary has to pay tax on income of
previous year in the assessment year.
They can also get benefits of deduction which help them to reduce tax liability.
Other than salary employees are benefited by perquisites and allowances..
There are various exemptions under the income tax act. They are as follows:
Leave Travel Concessions
Gratuity
Encashment of Leave Salary
Retrenchment Compensation
Retirement Compensation to Employees
Tax on Perquisites Paid by Employer
Payment from Statutory/ Public PF
Payment from Recognized PF
House Rent Allowance
Payment from Superannuation
Pensions to Gallantry Award Winners

CONCLUSION
Salary is the remuneration received by or accruing to an individual,
periodically, for service rendered as a result of an express or implied contract. The
actual receipt of salary in the previous year is not material as far as its taxability is
concerned. The existence of employer-employee relationship is the sine-qua-non
for taxing a particular receipt under the head salaries.
The employee or individual who earn salary has to pay tax on income of
previous year in the assessment year. They can also get benefits of deduction which
help them to reduce tax liability. Other than salary employees are benefited by
perquisites and allowances.. There are various exemptions under the income tax
act. They are, Leave Travel Concessions, Gratuity, Encashment of Leave Salary,
Retrenchment Compensation, Retirement Compensation to Employees, Tax on
Perquisites Paid by Employer, Payment from Statutory/ Public PF, Payment from
Recognized PF, House Rent Allowance, Payment from Superannuation, Pensions to
Gallantry Award Winners