INCOME FROM SALARIES (Sec 15-17)

Meaning of Salary:
Any remuneration paid by an employer to an employee in consideration of his
services is called salaries. It includes monetary value of those benefits and
facilities, which are provided by the employer and are taxable.Income forming
part of salary: They include basic salary, advance salary, fees, commission,
bonus, taxable value of cash allowances, perquisites and retirement benefits.
Section 17 of the Act gives an inclusive definition of salary. Broadly, it
includes:
 Basic salary
 Fees, Commission and Bonus
 Taxable value of cash allowances
 Taxable value of perquisites
 Retirement Benefits
Allowances in Income From Salaries :
These are of three types
1.Taxable Allowances: Dearness allowance, Medical allowance, Servant
allowance, Warden Allowance, Family allowance, City Compensatory
allowance etc.
2.Allowances exempt upto specified limit: House rent allowances,
Entertainment allowance, Certain Special allowances, etc.
3.Fully exempted allowances: Foreign allowance, sumptuary allowance to
High Court / Supreme Court Judges, Allowances from U.NO.
Fully taxable allowances
 Dearness Allowance and Dearness Pay
 City Compensatory Allowance
 Tiffin / Lunch Allowance
 Warden or Proctor Allowance
 Overtime Allowance
 Fixed Medical Allowance
 Servant Allowance
 Other allowances
Partially exempt allowances
This category includes allowances which are exempt up to certain limit.
House Rent Allowance (H.R.A.) Sec.10 (13A)
An allowance granted to a person by his employer to meet expenditure incurred
on payment of rent in respect of residential accommodation occupied by him is
exempt from tax to the extent of least of the following three amounts:
Format for computation of H.R.A
1)Rent-10% of Salary- XXX
2)House Rent Allowance actually received by the assessee- XXX
3) 50% of salary (If accommodation is situated in Mumbai,
Kolkata, Delhi, Chennai) OR
40% of salary (if accommodation is situated in any other place).- XXX
Least of the Above    XXX
If an employee is living in his own house and receiving HRA, it will be fully
taxable.
Entertainment Allowance Sec.16 (ii)
This allowance is first included in gross salary under allowances and
then deduction is given to only government employees under Section 16 (ii).
Limit
Gross Salary    XXXXXX
1)    5000
2)    1/5 of the Salary
3)    Actual Amount
Least of the Above    XXX
Special Allowances for meeting official expenditure
Certain allowances are given to the employees to meet expenses incurred
exclusively in performance ofofficial duties and hence are exempt to the extent
actually incurred for the purpose for which it is given. These include travelling
allowance, daily allowance, conveyance allowance, helper allowance, research
allowance and uniform allowance.
Children Education Allowance
This allowance is exempt to the extent of Rs.100 per month per child for
maximum of 2 children
Children Hostel Allowance
Exempt to the extent of Rs.300 per month per child for maximumof 2 children.
Transport Allowance
An amount uptoRs.800 per month paid is exempt. However, in case of blind and
orthopedically handicapped persons, it is exempt up to Rs. 1600p.m.
Out of station allowance
Exempt up to 70% of such allowance or Rs.6000 per month, whichever is less
Transport Allowance
An amount uptoRs.800 per month paid is exempt. However, in case of blind and
orthopedically handicapped persons, it is exempt up to Rs. 1600p.m.
Out of station allowance
Exempt up to 70% of such allowance or Rs.6000 per month, whichever is less
FULLY EXEMPT ALLOWANCES
 Foreign allowance is usually paid by the government to its employees
being Indian citizen posted out of India for rendering services abroad. It is
fully exempt from tax.
 Allowance to High Court and Supreme Court Judges of whatever nature
are exempt from tax.
 Allowances from UNO organisation to its employees are fully exempt
from tax.
 Retirement Benefits in Income From Salaries
 Gratuity Sec.10 (10)
 1) Govt Employee death cum retirement is wholly exempt from tax
2) Employees covered by the payment of Gratuity Act 1972
 Actual Gratuity    Xxxx
1) 10,00,000    Xxxx
2)15/26*last  drawn  salary  *completed  year  of    Xxx
service or Part of the year in excess of 6 months.    Xxxx
3) Actual Amount    —————-
Least of the above    Xxxxx
Taxable Gratuity    Xxxxx
 3) Employees not covered by the payment of Gratuity Act 1972
Actual Gratuity    Xxxx
1) 10,00,000    Xxxx
2)1/2 *  Average last 10 months salary * complted    Xxx
year of service    Xxxx
3) Actual Amount    —————-
Least of the above    Xxxxx
Taxable Gratuity    Xxxxx
 PENSION benefits in Income From Salaries :
 Un commuted pension refers to pension periodically received by
the employee. It is taxable in the hands of the both Govt. and Non Govt
Employees.
 Commuted pension Sec.10 (10A) means lumsum amount taken by
commuting the pension or part of the pension. Any commuted pension
received by a Govt employee is wholly exempt from tax.
 LEAVE SALARY. Sec.10 (10AA) benefits in Income From Salaries :
Govt employee is wholly exempt from tax.
 Others are following
Actual Amount    Xxxx
1) 300,000    Xxxx
2)10* salary (Average last 10 months salary )    Xxx
3)cash  equivalent  leave*  Average  last  10  months    Xxxx
salary    —————-
 3) Actual Amount    Xxxxx
Least of the above
Taxable Amount    Xxxxx
 RETRENCHEMENT COMPENSATION Sec.10(10B) benefits in
Income From Salaries :  
 Actual Amount    Xxxx
1) Amount calculated under the Industrial Disputes    Xxxx
Act 1947.    Xxx
2) 500,000    —————
Xxxxx
TaxableAmount    Xxxxx
 VOLUNTARY RETIREMENT SCHEME  Sec.10(10C)
 Employee who has completed 10 years of service or completed 40
years of age Xxxx
Actual Amount
1) last drawn salary *3* complted years service    Xxxx
OR    Xxx
last drawn salary  * remaining months of service    xxxx
whichever is lower    —————-
2)500,000    Xxxxx
3)actual Amount Received
Taxable Amount    xxxxx


 RENT FREE ACCOMADATION Sec.17(2)  benefits in Income From

Salaries :
 Govt  Employee : License fee determined by the  GovtOther than
Govt Employee
 

Notes 2
For the purpose of Sections 15 and 16 of the Income Tax Act the term 'salary' includes :

      Wages
      Any annuity or pension
      Any gratuity
      Any fees, commissions, perquisites or profits 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 i.e., encashment of leave salary.
       The annual accretion to the recognized provident fund of a n employee to the
extent provided in the rules. This may take two forms.
 o   Employer's contribution to Provident Fund.
o   Interest credited on the accumulated balance of recognized provident fund standing to the
credit of the employee.

As per rules employer's contribution to the P F in excess of 12% of the salary of the
employee and the interest credited to the PF accumulations in excess of 9.5% will be
considered as salary.

         Amount of the transferred balance of recognized provident fund to the extent to which it is
taxable.

         Tax-free salary: Sometimes the employer deducts the tax at source and pays net salary to the
employee. In such cases the individual has to show the aggregate salary i.e., net salary plus
tax paid in his gross total income.

RULES REGARDING SALARY:

Relation between Payer and Payee: The relation between payer and payee should be that of
employer and employee. In other words for an income to be taxed under head salaries the
relation between payer and payee should be of employer and employee. Employer may be an
Individual, firm, AOP etc and an employee may be full time or part time employee. If the
relation between payer and payee is not that of employer and employee income received
cannot be charged under head Salaries it would be charged under other heads.

Salary and wages: Income tax does not differentiate between salary and wages.

Salary from more than one source: If an Individual receives salary from more than one
employer during same previous year, salary from each source is taxable under the head
Salaries.

Overtime payment: Any over time payment received by an employee is added to Gross

Salary.

Basis of Charge: As per section 15

 Any salary due from an employer, or former employer in the previous year, whether
paid or not
 Any salary paid or allowed to an employee in the previous year by or on behalf of an
employer though not due or before it becomes due to him

Hence salary is taxable on due or receipt basis whichever is earlier.

Fee and Commission: Any fee or commission paid by employer to his employee on Net
profit or Turnover is added to Gross Salary.

Grade system: Under this system the normal annual increments to be given to the employee
is already fixed. Annual increment is given on the same date on which employee joins the
employment.
Employer employee relation: Income can be charged under head Salaries only if relation
between receiver and giver of payment is of employee and employer. Employer may be
individual, firm, company, AOP, BOI, Govt., etc.

 Income by way of examinership fees received by a professor from the same

university in which he is employed would not be chargeable to tax under this head but must
be taxed as Income from other sources under Section 56.

 Income by way of remuneration received by a managing director would be taxable

as his salary income whereas the income received by him as director‘s fees in his capacity
as director for attending the meetings of the Board would be assessable under the head
Income from other sources.

 An official liquidator appointed by the Court or by the Central Government would

also become an employee of the Central Government under Section 448 of the Companies
Act, 1956 and consequently the remuneration due to him would also be assessable under the
head Salaries.

 Remuneration received by a manager of a company even if he is wrongly designated

as a director or by any other name would be chargeable to tax under this head regardless of
the fact that the amount is payable to him monthly or is calculated at a certain percentage of
the company‘s profits.

 Any money from his employer as part of the terms of employment for not carrying on
any profession, such income must be taxed as salary income.

 Any salary, commission, bonus etc received by partner of a firm will be charged
under head PGBP.

 Salary received by Member of Parliament is to be charged under head Other sources

and not under head Salary.

                     Allowances
Allowance is a fixed monetary amount paid by the employer to the employees for meeting
particular expense, whether personal or for the performance of duties. Allowances are
generally taxable and are included in the gross salary unless a specific exemption has been
provided in respect of any such allowance. Specific exemption in respect of allowances are
provided under the following sections.

 House Rent Allowance

 Prescribed Special Allowances.

HOUSE RENT ALLOWANCE:

House Rent Allowance is given by the employer to the employee to meet the expenses in
connection with rent of accommodation which the employee might have to take. HRA is
taxable under head Salaries to the extent it is not exempt under section 10(13A). HRA is
exempt under section 10(13A) to the extent of the minimum of the following three.

 Actual HRA Received by the employee

 Excess of Rent paid for the accommodation occupied by him over 10% of the salary
for the relevant period, that is Rent paid – 10% of Salary
 50% of the salary where the residential house is situated at Mumbai, Kolkata, Delhi or
Chennai and 40% of the salary where the house is situated at any other place.

Salary for the purpose of calculating HRA means

Basic Salary
DA
Commission for fixed percentage of turnover achieved by employee as per employment
contract.

Any excess of HRA received over the exempted amount will be taxed as salary. The
exemption in respect of HRA will not be available if the
(a) Residential accommodation occupied by the assessee is owned by him or
(b) The assessee has not actually incurred expenditure on payment of rent in respect of the
residential accommodation occupied by him.

Prescribed special Allowance can be classified under two heads

Special Allowance for Performance of official Duties

Allowance to meet personal Expenses.

Special Allowance for Performance of official Duties: These allowances are provided for
meeting expensed incidental with performance of job and hence are exempted to the
minimum of

 Actual Amount spent on the purpose for which allowance was provided
 Actual amount received.

These allowances are

 Travelling Allowance: Allowance paid to meet the expenses of official tour or on

transfer of duty

 Daily Allowance: Allowance paid to an employee to meet his daily expenses who is
on tour or due to transfer is absent from his normal place of duty.

 Conveyance Allowance: Allowance granted to meet the expenditure incurred on

conveyance in performance of duties of an office or employment of profit provided free
conveyance is not provided.

 Uniform Allowance: Any allowance by whatever name called granted to meet the
expenditure incurred on the purchase or maintenance of uniform for wear during the
performance of the duties of an office or employment.

 Academic Allowance: Allowance provided to encourage further studies or research.

Allowance to meet personal Expenses: These allowances are provided to meet personal

expenses of the employee and can be sub divided in two catagories.
 Allowances which are exempted to the extent of amount received or the limit specified
Allowances which are fully taxable

Allowances which are exempted to the extent of amount received or the limit
specified: These allowances are exempted to the amount received or the limited specified
whichever is less.

         Children Education Allowance: It is exempt upto Rs.100 P.M. per child upto maximum of
two children or the amount received whichever is less.

         Hostel Expenditure Allowance: It is exempt upto Rs.300 P.M. per child upto maximum of
two children or the amount received whichever is less.
         Transport Allowance: Allowance provided to meet the expensed of commuting from
residence to place of work and back is exempted upto Rs. 800 P.M.

Allowances which are fully taxable

         Dearness Allowance, Additional Dearness Allowance and Dearness Pay: This is a very
common allowance these days on account of high prices. Sometimes Additional Dearness
Allowance is also given. It is included in the income from salary and is taxable in full
         Fixed Medical Allowance: It is fully taxable.
         Tiffin Allowance: It is given for lunch and refreshments to the employees.
         Servant Allowance: It is fully taxable even if it is given to a low paid employee, not being an
officer, i.e., it is taxable for all categories of employees.
         Non-practising Allowance: It is generally given to those medical doctors who are in
government service and they are banned from doing private practice. It is to compensate them
for this ban. It is fully taxable.
         Hill Allowance: It is given to employees working in hilly areas on account of high cost of
living in hilly areas as compared to plains. It is fully taxable, if the place is located at less
than 1,000 metres height from sea level.
         Warden Allowance and Proctor Allowance: These allowances are given in educational
institutions for working as Warden of the hostel and/or working as Proctor in the institution.
These allowances are fully taxable.
         Deputation Allowance: When an employee is sent from his permanent place of service to
some other place or institution or organisation on deputation for a temporary period, he is
given this allowance. It is fully taxable.
         Overtime Allowance:
         Other Allowances like Family allowance, Project allowance, Marriage allowance, City
Compensatory allowance, Dinner allowance, Telephone allowance etc. These are fully
taxable.

ENTERTAINMENT ALLOWANCE: Deduction for entertainment Allowance is available

only to Government Employees only. Entertainment Allowance is first included in the Salary
and then deduction is made. Amount deducted is least of the following Three

 Actual Entertainment Allowance Received

 20% of salary exclusive of any allowance, benefit or perquisite
 5000
 Perquisites
Definition:  As per section 17 Perquisite means:
         The value of rent-free accommodation provided to the assessee by his employer;
         The value of any concession in the matter of rent respecting any accommodation provided
to the assessee by his employer;
         The value of any benefit or amenity granted or provided free of cost or at concessional rate
to specified employees
         The value of any specified security allotted or transferred, directly or indirectly, by any
person free of cost or at concessional rate, to an individual who is or has been in
employment of that person 
         Any sum paid by the employer in respect of any obligation which but for such payment,
would have been payable by the assessee;
         Any sum payable by the employer, whether directly or through a fund, other than a
recognized provident fund or an approved superannuation fund or a Deposit-linked
Insurance Fund 
         Any sum paid by the employer in respect of any expenditure actually incurred by the
employee on his medical treatment or treatment of any member of his family

Taxability of Perquisites

Perquisites which are taxable in hands of all employee:

         The value of rent-free accommodation provided to the assessee by his employer;

         The value of any concession in the matter of rent respecting any accommodation provided
to the Assessee by his employer;
         The value of any benefit or amenity granted or provided free of cost or at concessional rate
to specified employees
         The value of any specified security allotted or transferred, directly or indirectly, by any
person free of cost or at concessional rate, to an individual who is or has been in
employment of that person 
         Any sum paid by the employer in respect of any obligation which but for such payment,
would have been payable by the Assessee;
         Any sum payable by the employer, whether directly or through a fund, other than a
recognized provident fund or an approved superannuation fund or a Deposit-linked
Insurance Fund 
         The value of any other fringe benefits as may be prescribed.
 Perquisites which are taxable in hands of specified employee:

         Gas, electricity or water supplied free for household consumption free or at concessional
rates.
         Service of sweeper Gardner watchmen or personal assistance
         Free or concessional educational facilities.
         Motor car
         Personal or private journey provided free of cost or at a concessional rate to employee or
any member of his household

These perquisites are taxable only in case of specified employees if such services are
provided. In case monetary reimbursement is provided then it will taxable in hands of all
employees.

SPECIFIED EMPLOYEES

The following are the specified employee for the purpose of the section-17(2)(iii):
1.         A director employee of Employer Company.
2.         An employee who has substantial interest in the employer company.
3.         An employee (not covered by above) whose income under the head ‘salaries’ (whether due
from, or paid or allowed by, one or more employers) excluding the value of all non-
monetary benefits and amenities, exceeds Rs.50,000.

While computing the limit of Rs.50, 000 the following are deducted/ excluded:
(a)        all non-monetary benefits;
(b)        deduction u/s.16 (ii), & (iii) i.e., deduction for entertainment allowance and profession tax.

Valuation of Perquisites
VALUE OF ACCOMMODATION PROVIDED RENT FREE OR AT
CONCESSIONAL RATES.

Accommodation: Accommodation provided by the employer to an employee may be

         Free Accommodation
         Accommodation at concessional Rate.

Rent Free Accommodation: Rent free accommodation is the accommodation provided by

employer for free of cost to its employee. It may be
         Furnished
         Unfurnished.

Unfurnished Rent Free  Accommodation Provided by Govt: License fee determined by

Union or State Government in respect of accommodation in accordance with the rules framed
by that government as reduced by the rent actually paid by the employee.
 Furnished Rent Free Accommodation Provided by Govt:

Calculate Value of accommodation as unfurnished

Add                 10% p.a. of the cost of furniture
Add                 if such furniture is hired from a third party, the actual hire charges payable for the same
reduced
Less                 any charges paid or payable for the same by the employee during the previous
year.

Where the Rent Free Accommodation is provided by any other employer and the
accommodation is owned by the employer: Value of perquisite will be

15% of salary in cities having population exceeding 25

10% of salary in cities having population exceeding `10 lakh but  not exceeding 25 lakh as
per census of 2001,
7.5% of salary on other cities
           
Where the Rent Free Accommodation is provided by any other employer and the
accommodation is not owned by the employer:                  

Value of perquisite will be

15% of salary
Or
Actual amount of lease rental paid or payable by the employer

Whichever is lower as reduced by the rent, if any, actually paid by the employee.

In case Accomodation is provided in a Hotel for all employees: 24% of salary paid or

payable for the previous year or the actual charges paid or payable to such hotel, which is
lower, for the period during which such accommodation is provided as reduced by the rent, if
any, actually paid or payable by the employees.

Basic Salary   D.A. forming part of retirement benefits Bonus Any other allowance +

pension received from old employer.

Exceptions:
I. Temporary Accommodation provided in remote area (location which is 40KM
from a town whose population is less than 20,000) whose area is less than 800 sq ft.

II. Accommodation provided at new place of posting on transfer while retaining

the accommodation at the other place for 90 days of less. In such case value of only
one accommodation is taxed upto 90days and beyond that both accommodation are
taxable as perquisites.

III. Accommodation provided in hotel

 For 15days or less
 Due to transfer from one place to another.
 VALUATION OF MONETARY OBLIGATION OF EMPLOYEE DISCHARGED BY
THE EMPLOYER

Following are some of the monetary obligation that will be taxable in hands of specified
employees if the employer pays for such services. However in case employer reimburses for
the expense then it will be taxable in hands of all employees.

 Gas, Electric Energy or Water bill

 Sweeper, Gardener, Watchman or a Personal Attendant
 Medical expenses reimbursed in excess to Rs. 15,000

INTEREST FREE OR CONCESSIONAL LOAN

The value of the benefit to the assessee resulting from the provision of interest free or
concessional loan made available to the employee or any member of his household during the
relevant previous year by the employer or any person on his behalf shall be determined as the
sum equal to the simple interest computed at the rate charged by the State Bank of India on
1st April of Relevant PY in respect of loans for house and conveyance and at the rate charged
by the State Bank of India for other loans on the maximum outstanding monthly balance as
reduced by the interest, if any, actually paid by him or any such member of his household.

Exceptions:
 For medical treatment in respect of diseases specified in rule 3A
 The amount of loans does not exceeds in the aggregate Rs. 20,000.
                                                                                                                             
In case any amount is reimbursed to employee under any medical insurance scheme then such
loan which acquired for treatment of diseases specified in Rule 3A will be taxable from the
month in which such reimbursement is received up to the month in which employer repays
the employer.

In case any interest is recovered from employee then such amount will be reduced from value
of perquisite.

VALUE OF FREE AND NON ALCOHOLIC BEVERAGES

Conditions Value
Tea snack during working hours Nil
Free food and non alcoholic beverages Nil
provided during working hours in
         Remote area or
         Off shore drilling
Free food and non alcoholic beverages Taxable if the value of food exceeds Rs. 50
provided during working hours in per meal. If does not exceeds Rs. 50 then it
 Office or business premises will not be taxable.
 Food vouchers

In case any amount is recovered from employee then such amount will be reduced from value
of perquisite.
 TAX-FREE PERQUISITES

Medical facility

 The value of any Medical facility provided to an employee or his family member in
any hospitals, clinics, etc. maintained by the employer.
 Reimbursement of expenditure actually incurred by the employee on medical
treatment for self or for his family members in any hospitals, dispensaries etc. maintained by
the Government or local authority or in a hospital approved under the Central Health Scheme
or any similar scheme of the state Government or in a hospital, approved by the chief
commissioner having regard to the prescribed guidelines for the purposes of medical
treatment of the prescribed diseases or ailments
 Group medical insurance obtained by the employer for his employees including
family members of the employees
 Reimbursement of medical expenses actually incurred by the employee upto a
maximum of ` 15,000 in the aggregate in a year, in a private hospital for his and his family

Recreational facilities: The value of recreational facilities provided is exempt only in case

such facility is open to all employees.

Training provided to employees.

Food and beverages.

 Non alcoholic beverages provided at work place during working hours.
 Free meals provided in remote area or on off shore drillin
 Free meals provided at the place of work upto Rs 50

Interest free loan upto Rs. 20,000 or for treatment of a disease specified in Rule 3A.

Rent-free house to

 Supreme/High Court Judges

 Officer of Parliament,
 a Union Ministry and a
 Leader of opposition in Parliament.
 Members of UPSC.

Conveyance facility to High Court and Supreme Court judges.

Leave travel concession exempt as per provision of Section 10.

Sum payable by an employer through a Recognised Provident Fund upto 12% of salary.

Sale/Gift of an asset other than car/electronic item to an employee after using the same by
the employer for 10 years or more is a perquisite in the hands of employee
 RETIREMENT BENEFITS
GRATUITY
 Gratuity is the amount paid to an employee for continuous service for not less than 5 yrs. So
the exemption of Gratuity is available only when
 Employer employee relation Exists
 On termination of employment due to death, accident, resignation, retirement etc.

In case of Govt Employees: It is wholly exempt from tax under Section 10(10)(i) of the Act.

Other Employees covered under The Payment of Gratuity Act, 1972: In case of
employees covered under Gratuity Act 1972 Death Cum Retirement Gratuity will be
exempted to the minimum of the following

1)      Actual Amount Received

2)      Last Salary × 15 × Completed years
                    26
3)      Rs. 10,00,000.

Completed year: It means every completed year and part of year above Six months
Example.
11 yrs 6 month 0 days = 11 yrs
11 yrs 6 month 10 days = 12 yrs

Salary means Last salary Drawn by the employee including

Basic + DA forming part of retirement Benefit + Commission based on fixed percentage of
turnover

Other Employees not covered under The Payment of Gratuity Act, 1972: In case of
employees covered under Gratuity Act 1972 Death Cum Retirement Gratuity will be
exempted to the minimum of the following

1)      Actual Amount Received

2)      Average Salary × 15 × Completed years
                     30
3)      Rs. 10,00,000.

Completed year: It means only completed year Example.

11 yrs 6 month 0 days = 11 yrs
11 yrs 11 month 15 days = 11 yrs

Average salary means 10 month average salary immediately preceeding the month in which
retirement/termination takes place.

In case employee retires on 15 Jan 2012 average will be taken from 1 Mar 2011 to 31 Dec
2011.
In case of seasonal worker gratuity is paid for 7 days.

In case of Piece rated employee daily wages shall be calculated on average of 3 months

immediately preceding the termination of employment. This excludes any over time payment.

In case gratuity is received from two different employer in two different PY then amount of
exemption availed during first time gratuity was received would be reduced from the
maximum amount of exemption.

PENSION
Pension is a payment made by the employer after the retirement/death of the employee.

In case pension is paid to employee after retirement it is taxable under head salary.

However in case pension is paid to employee’s family after his death it is known as family
pension and is taxable under head Other Sources.

UnCommuted Pension: When pension is paid on monthly basis it is known as commuted

pension and is taxable in hands of all employees (Govt and other).

Commuted Pension: When lump sum amount is paid to employee against part of pension
this is known as commuted pension

Commuted Pension in case of Govt employees, local Authorities, Statutory Corp: It is

paid as per Civil pension rules of central govt and hence is fully exempt.

Commuted pension in case of other employees.

 When Gratuity is also received: Amount of exemption will be 1/3rd value of which

assessee is entitled to receive. In other words Amount exempt shall be one third of commuted
value of full pension. In this case exemption will be calculated as

Exemption =               Amount Rcvd as commuted pension × Total Pension            ×         1

                                                                                                Part of pension commuted      3
                                                      Or
Exemption = Amount Rcvd as commuted pension ×             100                                        ×1
                                                                                    %age of pension commuted                 3

 When Gratuity is not received: Amount of exemption will be 1/2 value of which

assessee is entitled to receive. In other words Amount exempt shall be half of commuted
value of full pension. In this case exemption will be calculated as

Exemption =               Amount Rcvd as commuted pension × Total Pension            ×         1

                                                                                                Part of pension commuted      2
                                                      Or
Exemption = Amount Rcvd as commuted pension ×             100                                        ×1
                                                                                    %age of pension commuted                 2
 ENCASHMENT OF EARNED LEAVE

Leave Encashment During tenure of Service: Leave encashment to an employee while he

continues to be in service with the same employer is taxable in case of all employees (Govt
and others) under head Salary.

Leave Encashment at the time of retirement:

 In case of Govt Employees: Leave encashment to a govt employee at time of

retirement/resignation is fully exempt.

 In case of Other Employees/Local Authourity/Public Sector Under taking. It is

exempt to the extent of least of following.

o   Amount Rcvd

o   10 months Salary

o   Average Salary × No. of unavailed leaves on the basis of 30days entitlement per yr
30

o   Rs. 3,00,000 less any previous exemption

Meaning of Salary: Salary means Basic+DA (forming part of retirement benefit) +

Commisison earned on fixed turnover.

Average Salary: Average salary is to be taken 10 month average salary immediately

preceding retirement.

In case Date of Retirement is 15 Jan 2012 so average will be taken from 16 April 2011 to 15
Jan 2012.

Unavailed 30 days leave will be calculated only for completed years only.
Any exemption availed during previous retirement is to reduced from limit of Rs. 3,00,000

RETRENCHMENT COMPENSATION
Any compensation received by a workman under the Industrial Disputes Act, 1947 or under
any other Act or rules, orders or notifications issued thereunder or under any standing orders
or under any award, contract of service or otherwise, at the time of his retrenchment. The
amount is exempt under this clause to the extent of least of the following limits:

(i) Actual amount received.

(ii) Rs .5,00,000
(iii) 15 Days Salary for every completed year of part of year above six months.

PAYMENT RECEIVED ON VOLUNTARY RETIREMENT

Any amount received or receivable by an employee of

 A public sector company or
 Of any other company or
 An authority established under Central, State or Provincial Act or a local authority, or
any State Government or Central Government or
 The Institution having importance throughout India or
 A recognized management institute,

on his voluntary retirement or termination of his service, in accordance with any scheme or
schemes of voluntary retirement or in the case of a public sector company, a scheme of
voluntary separation. The scheme of voluntary retirement are to be framed in accordance with
such guidelines as may be prescribed which may include among other things the criteria of
economic viability.

The amount of exemption is the

 actual amount of compensation or
 Rs. 5,00,000,

Whichever is less.

This exemption is available only once in the life time of an assessee.

PROVIDENT FUND

Provident Fund scheme is a welfare scheme for the benefit of the employees. Under this
scheme a certain sum is deducted by the employer from the employee’s salary as his
contribution to the provident fund. Employer also contributes a certain percentage of the
salary of the employee to the provident fund. This amount is invested in the name of the
employee. Interest earned is also credited PF A/c. some other points are

Kinds of PF

Statutory PF: It is set up under PF Scheme 1925 for Govt and Semi Govt Employees,
university/educational institutions.

 Employee’s contribution is out of their income so it is not taxed again.

 Employers contribution and the interest thereon is also fully exempt.          

Recognized PF: It is set up under PF scheme 1952 and is compulsory for every employer
who has 20 or more employees to run this scheme in his organization. For others it is
discretionary.

 Employee’s contribution is out of their income so it is not taxed again.

 Employers contribuition in excess to 12% is taxable in hands of employee
 Interest credited in excess to 9.5% is taxable is taxable in hands of employee

UnRecognised PF: PF scheme which is not approved by Commissioner of PF and Income

tax is known as unrecognized PF. In case it is approved by Commissioner of PF but not by IT
it would still be known as unrecognized PF.

 Employee’s contribution is out of their income so it is not taxed again.

 Employer’s contribution is not taxable every year however total employers
contribution is taxable under head Salary in the year in which it is paid to employee or when
it is credited to recognized PF Ac.
 Only interest on employer’s contribution is taxable under head Other Sourcesin the
year in which it is paid to employee or when it is credited to recognized PF Ac.

Public Provident Fund (PPF): The Central Government has established a fund for the
benefit of public to mobilize personal savings. Any member of the public, whether salaried or
self-employed; and contributed to the fund by opening a provident fund account at any
branch of the State Bank of India or its subsidiaries or other nationalized bank.

Even a salaried employee can simultaneously become a member of employee’s provident

fund (whether statutory, recognized or unrecognized) and public provident fund. Any amount
in multiple of Rs.5 (subject to minimum of Rs.1000 and maximum of Rs.100, 000 p.a.) May
be deposited in this account. Interest is credited every year but payable only at the time of
maturity.

Interest earned on this fund is exempted from tax u/s 10(11).

APPROVED SUPERANNUATION FUND.

 Employers contribution in excess to Rs. 1,00,000 is taxable in hands of employee.

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

DEDUTION FROM SALARIES U/S 16

Entertainment Allowance 16(ii): Deduction for entertainment Allowance is available only

to Government Employees only. Entertainment Allowance is first included in the Salary and
then deduction is made. Amount deducted is least of the following Three

 Actual Entertainment Allowance Received

 20% of salary exclusive of any allowance, benefit or perquisite
 5000

Professional Tax Paid 16(iii):Any sum actually paid by the assessee on account of
professional tax / tax on employment shall be allowed as deduction from Gross Salary.
However if Professional Tax is paid by employer on behalf of employee, then first it will be
included in Gross Salary and then deducted from Gross Salary. Professional Tax due but not
paid shall not be allowed as deduction.