GOLs e-Learning Portal

Live Virtual Classroom

(LVC)
Topic
: Salary
Paper : Direct and Indirect Taxes
Program : Executive
Faculty : CA Prasad Phadke

Meaning of salary
Sec. 17(1) gives an inclusive definition of Salary:
Salary includes
-Wages
- Any annuity or pension
- Any gratuity
-Any fees, commission, perquisites or profits in lieu of or in
addition to any salary of wages
-Any advance of salary
-Leave encashment
- Contribution to Recognised provident fund in excess of 12%
- Contribution by Central Government for employee under
notified pension scheme under Section 80 CCD.

Computation of salary
Particulars

Amount

Amount

Basic

**

Bonus

**

Allowances:
i) D.A.
ii) HRA
iii) Travelling etc

**
**
**

**

Perquisites

**

Retirement Benefits

**

Advance salary received

**

Gross Salary

***

Less: Deductions u/s 16

16(ii) Entertainment Allowance
16(iii) Professional Tax
Net salary

**
**

**
**

Allowances
Fully Exempt :
expenditure
official exp

i)
ii)
iii)
iv)
v)
vi)

Travelling
Conveyance
Daily
Helper
Uniform
Academic

Exempt to
the extent
specified

Fully taxable
(all other
allowance)

i) Children education allowance 100 p.m. p.c. max 2

children
ii) Hostel expenditure allowance: 300 p.m. p.c. max 2
children
iii) Underground allowance :800 p.m.
iv) Transport allowance: 800 p.m. /(1,600 pm wef AY
2016-17) (For blind or handicapped employee 1600
p.m. (3,200 wef AY 2016-17)
v) Transport allowance for transport employers
employees- 10000 p.m. OR 70% of actual allowance,
whichever is less
vi) Tribal area allowance: 200 p.m.

House Rent Allowance: Exempt u/s

10(13A)
Quantum of exemption -Minimum of the following:
i) Allowance actually received
ii) Rent paid in excess of 10% of salary
iii) 50% of salary for Metros OR 40% of salary for Non Metros.
Note:
Exemption is not available to an assessee who lives in his own house, or
in a house for which he has not incurred the expenditure of rent.
Salary for this purpose means basic salary, dearness allowance, if
provided in terms of employment and commission as a fixed percentage
of turnover.
Relevant period means the period during which the said accommodation
was occupied by the assessee during the previous year.

Practical Question
Q. From the following details compute Gross Salary for Mr. Rajesh for
the A.Y. 2016-17.
Basic Rs. 2,00,000
D.A. Rs. 50,000 (60% forms part of retirement benefit)
Child Education allowance Rs. 8,000 (For 2 children)
Travelling allowance Rs. 12,000 (Official Exp Rs. 8,000)
Project allowance Rs. 20,000 (Official Exp Rs. 15,000)
Bonus Rs. 40,000
HRA Rs. 60,000 (Rent paid for flat in Delhi Rs. 70,000)

Solution:
HRA Exemption:
i) Allowance actually received = 60,000
ii) Rent paid in excess of 10% of salary = 70,000-(2,30,000*10%)
= 70,000-23,000
= 47,000
i) 50% of salary for Metros
= 2,30,000*50%
= 1,15,000

Solution:
Computation of Gross salary
Basic
D.A.
Child Education allowance
Less: Exempt (100*2*12)
Travelling allowance
Less: Exempt
Project allowance
Bonus
HRA
Less: Exempt
Gross Salary

2,00,000
50,000
8,000
2,400
12,000
8,000

5,600
4,000
20,000
40,000

60,000
47,000

13,000
3,32,600

Treatment of Provident Fund

Particulars

SPF

RPF

1.Employees
contribution

Deduction Deduction
u/s 80 C
u/s 80 C

2.Employers
contribution

Fully
exempt

URPF

PPF

No Deduction u/s 80 C

80 C

Exempt
Not exempt
upto 12% of
salary

N.A.

3. Interest on Fully
PF
exempt

Exempt
upto 9.5%

Not exempt

Fully
exempt

4.Repayment of Fully
lump sum
exempt

Fully
exempt

i) Employers contribution Fully

+ Interest thereon is taxable exempt
under salary.
ii) Interest on employees
contribution is charged as
income from other sources

Perquisite - Valuation of Rent-Free

Accommodation
For Central and State Govt. employees

Value of perquisite is equal to the LICENSE FEE determined by

appropriate Govt.
Rent free official residence provided to Judge of HC or SC, an official of
parliament, a union Minister or a Leader of opposition is TAX-Free.

Private sector or other employees

Basis of Valuation: CITY

Population > 25L

10L>=25 L

10 L >= P

Accommodation

15 % of salary

10% of salary

7.5% of salary

Taken on lease or
rent by employer

15% of salary (OR)

actual rent, whichever
is less

15% of salary (OR)

actual rent,
whichever is less

15% of salary (OR)

actual rent,
whichever is less

.
owned by employer

Other Perquisites taxable for all employees

Interest free or concessional loans:

a) Loan for house :Value of benefit would be % prescribed by SBI

b) Other loans
:% prescribed by SBI Interest to be calculated on maximum
monthly outstanding balance (-) interest actually paid by him.
No value charged as benefit if;
i) Amount of loan < 20,000
ii) Loan is for disease specified under Rule 3A, to the extent loan is reimbursed
under any medical insurance scheme will be chargeable as perquisite
Use of movable assets: 10% p.a. of cost of assets OR amount of rent/charge paid
Transfer of any movable assets:

Value of benefit arising from transfer to employee or his family member, directly
or indirectly would be: - Transfer of computers/electronic items : Actual cost (-) 50% for every year* on
DBM
- Transfer of motor car
: Actual cost (-) 20% for every year* on DBM
- Transfer of any other assets
: Actual cost (-) 10% for every year* on SLM.
{* every completed year during which assets has been used by employer}

Q. Following benefits have been granted by Ved Software Ltd. to one of its employees
Mr. Badri:
(i) Housing loan @ 6% per annum. Amount outstanding on 1.4.2015 is Rs.
6,00,000. Mr. Badri pays Rs. 12,000 per month, on 5th of each month.
(ii) Air-conditioners purchased 4 years back for Rs. 2,00,000 have been given to Mr.
Badri for Rs. 90,000.
Compute the chargeable perquisite in the hands of Mr. Badri for the A.Y. 2016-17
The lending rate of State Bank of India as on 1.4.2015 for housing loan may be taken
as 10%.

balance for loan as

on the last day of each month. i.e.April=6,00,00012,000=5,88,000 and onwards
The perquisite value for computation is 10% - 6% = 4%
Month
Max Outstanding *Perquisite value at 4%p.m.
Value of Perquisite
April, 2015
5,88,000 *4%*1/12
=
1,960
May, 2015
5,76,000 *4%*1/12
=
1,920
June, 2015
5,64,000 *4%*1/12
=
1,880
July, 2015
5,52,000 *4%*1/12
=
1,840
August, 2015 5,40,000 *4%*1/12
=
1,800
September, 2015
5,28,000 *4%*1/12
1,760
October, 20155,16,000 *4%*1/12
=
1,720
November, 2015
5,04,000 *4%*1/12
1,680
December, 2015
4,92,000 *4%*1/12
1,640
January, 2016
4,80,000 *4%*1/12
1,600
February, 2016
4,68,000 *4%*1/12
1,560
March, 2016 4,56,000*4%*1/12
=
1,520

=
=
=
=

2. Perquisite Value of Air Conditioners:

Original cost
2,00,000
Depreciation on SLM basis for 4 years @10% i.e. Rs.2,00,000 x10% x 4
=
80,000
Written down value
1,20,000
Amount recovered from the employee
90,000
Perquisite value
30,000
Chargeable perquisite in the hands of Mr. Badri for the
assessment year 2016-17
Particulars
Amount (Rs.)
Housing loan
Air Conditioner
30,000
Total
50,880

20,880

Valuation of Motor Car facility

Particulars

Engine cc up to Engine
cc
1.6L.
exceeding 1.6L.
Owned / Hired by employer and completely used for No value to be added
official duty.
Owned / Hired by employer And completely used for Actual expenditure incurred including
Private Purpose
wear & tear (10% of cost of car).
Owned / Hired by employer and Partly used for official 1800 (+ 900 for 2400 (+ 900 for
duty And Partly used for Private Purpose (Expenses on chauffeur)
chauffeur)
running and maintenance met by Employer)
Owned / Hired by employer and Partly used for official 600 (+ 900 for 900 (+ 900 for
duty And Partly used for Private Purpose (Expenses on chauffeur)
chauffeur)
running and maintenance met by Employee)
Owned by Employee And Partly used for official duty And Actual exp by the Actual exp by the
Partly used for Private Purpose, Employer reimbursing the Employer Less Employer
Less
running & maintenance expense
above limits
above limits
Other conveyance Owned by Employee And Partly used for Actual exp by the official duty And Partly used for Private Purpose, Employer Employer minus
reimbursing the running & maintenance expense
900.

Other perquisites Specified Employees

Education Facility

Facility provided by employer: Cost of education in similar institution (Exempt for chaildren of
employee upto Rs. 1,000 p.m. per child
Reimbursement of exp: Fully taxable

Medical Facility: Treated as tax free perquisites when

- Provided to employee or family member in hospital maintained by employer.

- Expenditure in any Government hospital for medical treatment of employee or any of his family
members.
- Expenditure for treatment of diseases mentioned in rule 3A of I.T. Rules. Hospital should be
approved by CCIT.
- Any sum is paid by employer for reimbursing any amount actually incurred by employee for his or his
family members treatment in any hospital upto a limit of Rs.15,000/-.
- As insurance premium for insuring health of the employees with GIC.
- As reimbursement of insurance premium paid by employee for his or his family members health
insurance.

Gratuity [Sec. 10(10)]

(1) Covered by PAYMENT OF
GRATUITY ACT, 1972
Minimum of the following is exempt:
(1) Gratuity actually received.
(2) Statutory limit Rs.10 Lacs
(3) 15/26*Last drawn salary *No. of
completed years of service or part
thereof in excess of 6 months.
For employee in seasonal employment, it
would be 7 days Salary. Salary means
Basic (+) full dearness allowance but
excludes commission or bonus received.
[Last drawn salary]
* Salary includes Basic + D.A.

(2) Not covered by PAYMENT OF

GRATUITY ACT, 1972
Minimum of the following is exempt:
(1) Gratuity actually received
(2) Statutory limit Rs.10 Lacs
(3) * Average salary*Completed years of
service
* Average salary is to be calculated on the
basis of the average of salary for 10
months immediately preceding
the month in which such gratuity is
received.
* Salary includes Basic + D.A. (forming
part of retirement) + Commission
(fixed on turnover)

Points to remember for Gratuity:

Gratuity paid while in service is taxable
Gratuity received by Government employees after retirement is
fully exempt u/s 10(10)(i).
Taxable gratuity is eligible for Relief u/s 89(1)
The exemption of Rs. 10 lacs is available during the life time of the
assessee.
While calculating the no. of completed years of service when the employee
is not covered by POGA then the period of service during last employment
should also be considered if he is not entitled to gratuity during the
last employment.

PENSION
[S.10(10A)]

Uncommuted (monthly)
Fully taxable

Commuted
Received by Govt
employee

Received by Non-Govt
employee

Exempt

If gratuity is received
1/3 rd of total pension
is exempt

If gratuity is not received

of total pension
is exempt

Exemption for Leave Encashment [SEC. 10 (10AA)]:

i) In course of employment completely taxed
ii) At the time of retirement or leaving the job:
I) Leave encashment for Government. Employees completely
exempted.
II)Leave encashment for Non-Government employees: {MINIMUM
OF THE FOLLOWINGS}
(1) 10 months salary [Upto the date of retirement]
(2) Statutory limit Rs. 3,00,000
(3) Actually received
(4) Leave to the credit of employees * Avg salary of 10 m
Leave available- Leave taken= Bal leave
(Cash equivalent of earned leave to the credit of employee on the
basis of 10 months average salary not exceeding 30 days for every year
of actual service rendered by him.)

RETRENCHMENT COMPENSATION [Sec. 10(10B)]

Exempt from tax [minimum of the following]
1.Amount calculated in accordance with Sec.25 F (b) of Industrial
Disputes Act, 1947 i.e.15 days average pay for every year of
completed service or any part thereof in excess of six months.
2.Statutory limit 5,00,000/3.Actual amount received.
VOLUTARY RETIREMENT COMPENSATION [Sec. 10(10C)]
Exemption is to the extent of least of the following:
(i) Compensation actually received
(ii) Statutory limit = Rs. 5,00,000
(iii) Last drawn salary 3 completed years of service
(iv) Last drawn salary remaining months of service

Q. Mr. Narendra, who retired from the services of Hotel Samode Ltd., on
31.1.2016 after putting on service for 5 years, received the following
amounts from the employer for the year ending on 31.3.2016:
Salary @ Rs. 16,000 p.m. comprising of basic salary of Rs. 10,000,
Dearness allowance of Rs. 3,000, City compensatory allowance of Rs.
2,000 and Night duty allowance of Rs.1,000. Pension @ 30% of basic
salary from 1.2.2016. Leave salary of Rs. 75,000 for 225 days of leave
accumulated during 5 years @ 45 days leave in each year. He received
Gratuity of Rs. 50,000 (Not covered by Payment of Gratuity Act.
Compute the total income of Mr. Narendra for the assessment year 201617.

Answer:
Particulars

Income from Salaries

salary received during 1.4.15 to
31.1.16
Basic (Rs. 10,000 x 10)
Allowances:
Dearness allowance (3,000*10)
City
compensatory
allowance
(2,000*10)
Night duty allowance (1,000*10)
Pension
for
2
months
(10,000*30%*2)
Leave Salary
Less: Exempt (Note 1)
Gratuity
Less: Exempt (Note 2)

Amou
nt
(Rs.)

Amou
nt
(Rs.)

30,000 1,00,0
20,000
00
10,000 60,000

6,000
75,000
50,000 25,000
50,000
25,000 25,000

Computation of total income of Mr. Narendra for A.Y. 201617

Notes:
1. Leave encashment is exempt to the extent of least of the
following:
(i) Statutory limit = 3,00,000
(ii) Cash equivalent of leave for 30 days (30/45 x Rs.75,000) =
50,000
(iii) 10 months salary (10 x Rs.10,000) = 1,00,000
(iv) Actual amount received = 75,000
Therefore, Rs.50,000 is exempt under section 10(10AA).
2. Gratuity is exempt to the extent of least of the following:
(i) Statutory limit =10,00,000
(ii) Half months salary for 5 years of service ( 5 x Rs.5,000) =
25,000
(iii) Actual gratuity received = 50,000
Therefore, Rs.25,000 is exempt under section 10(10). It is assumed
that the employee is not covered under The Payment of Gratuity
Act, 1972.