Chapter – II

Heads of Income and

Computation of Income under the Head of Salary
Heads of Income:

Profits & Gains

Salaries Income from from Business
House Property or Profession

Capital Gains Income from

Other Sources

INTRODUCTION:
The provisions pertaining to Income under the head “Salaries” are contained in sections 15, 16 and
17.

Income under the head Salary

Chargeability Deduction (Section 16)

(Section 15) 1. Standard Deduction (Section 16ia)
2. Entertainment Allowance (Section 16(ii))
3. Professional Tax (Section 16(iii))

Meaning (Section 17)

1. Salary
2. Perquisite
3.Profits in lieu of Salary
EMPLOYER-EMPLOYEE RELATIONSHIP:
Before an income can become chargeable under the head ‘salaries’, it is vital that there should
exist between the payer and the payee, the relationship of an employer and an employee. As such
the existence of “employer-employee” relationship is the “sine-qua- non” for taxing a particular
receipt under the head salaries. It does not matter whether the employee is a full time employee or
a part-time one. If, for example, an employee works with more than one employer, salaries
received from all the employers should be clubbed and brought to charge for the relevant
previous years. Once the relationship of employer and employee exists, the income is to be
charged under the head “salaries”.

Case Study
(a) Katrina, an actress, is employed in Bansali Films, where she is paid a monthly remuneration of
Rs. 10 lakh. She acts in various films produced by various producers. The remuneration for
acting in such films is directly paid to Chopra Films by the different producers. Is the
amount received by Katrina is taxable as a Salary? Will your answer be different if she acts in
various films and gets fees from different producers?
Ans: Case 1: In this case, Rs. 10 lakh will constitute salary in the hands of Katrina, since the
relationship of employer and employee exists between Bansali Films and Katrina.
Case 2: if Katrina acts in various films and gets fees from different producers, the same income
will be chargeable as income from profession since the relationship of employer and
employee does not exist between Katrina and the film producers.

Foregoing of Salary v Surrender of Salary

Foregoing of Salary: Once salary accrues, the subsequent waiver by the employee does not
absolve him from liability to income-tax. Such waiver is only an application and hence, chargeable
to tax.
Surrender of salary: However, if an employee surrenders his salary to the Central Government
under section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the
salary so surrendered would be exempt while computing his taxable income.

Place of Accrual of Salary:

 Section 9(1)(ii), salary earned in India is deemed to accrue or arise in India even if it is paid
outside India or it is paid or payable after the contract of employment in India comes to an
end.
• If an employee gets pension paid abroad in respect of services rendered in India, the same
will be deemed to accrue in India.
 Leave salary paid abroad in respect of leave earned in India is deemed to accrue or arise in
India.

For this purpose, section 9(1)(iii) provides that salaries payable by the Government to a citizen of
India for services outside India shall be deemed to accrue or arise in India. However, by virtue of
section 10(7), any allowance or perquisites paid or allowed outside India by the Government to a
citizen of India for rendering services outside India will be fully exempt.

BASIS OF CHARGE:
Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or on
‘receipt’ basis, whichever is earlier. However, where any salary, paid in advance, is assessed in the
year of payment, it cannot be subsequently brought to tax in the year in which it becomes due. If
the salary paid in arrears has already been assessed on due basis, the same cannot be taxed again
when it is paid. As per Section 15, the income chargeable to income tax under the head salaries
would include:
• Any salary due to an employee from an employer or a former employer during the previous year
irrespective of the fact whether it is paid or not.
• Any salary paid or allowed to the employee during the previous year by or on behalf of an
employer, or former employer, would be taxable under this head even though such
amounts are not due to him during the accounting year.
• Arrears of salary paid or allowed to the employee during the previous year by or on behalf of an
employer or a former employer would be chargeable to tax during the previous year in
cases where such arrears were not charged to tax in any earlier year.
In short, salary is chargeable to tax on DUE OR RECEIPTS BASIS, whichever is earlier.
(i) Due basis – when it is earned even if it is not received in the P.Y. (Accrued)
(ii) Receipt basis – when it is received even if it is not earned in the P.Y. (Advance)

Difference between advance salary and advance against salary:

Loan is different from salary. When an employee takes a loan from his employer, which is
repayable in certain specified instalments, the loan amount cannot be brought to tax as salary of
the employee. Similarly, advance against salary is different from advance salary. It is an advance
taken by the employee from his employer. This advance is generally adjusted with his salary over a
specified time period. It cannot be taxed as salary.

Proforma for computation of income under the head “Salaries”

Sr. No. Particulars Amount Amount
1 Basic Salary XXX
2 Fees/Commission XXX
3 Bonus XXX
4 Allowances:
(a) Dearness Allowance XXX
(b) House Rent Allowance XXX
Less: Least of the following is exempt
HRA actually received XXX
Rent paid (-)10% of salary for the relevant XXX
period
50%/40% of salary for the relevant period XXX XXX
(c) Children Education Allowance XXX
Less: 100 per month per child up to maximum XXX
 of two children
(d) Children Hostel Allowance XXX XXX
Less: 300 per month per child up to maximum
of two children
(e) Transport allowance XXX
Less: (3,200 in case of blind or deaf and dumb XXX XXX
or orthopedically handicapped employee)
(f) Entertainment Allowance XXX
(g) Fixed Medical Allowance: XXX
This is an allowance paid by the employer
when the employee or any of his family
members fall sick for the cost incurred on their
treatment.
If any such reimbursement exceeds Rs.15,000
per year; the same is taxable.
(h) Special Allowance: A special allowance paid XXX
to employees is covered under section 14(i)
and does not fall within the purview of a
perquisite. It is essentially for performance
of a duty is partly taxable.
(i) Other Allowances XXX
5 Taxable Perquisites
(a) Valuation of rent free accommodation
If accommodation owned by the employer
(i) Cities having population > 25 lakh
15% of salary (–) rent recovered from
employee
(ii) Cities having population > 10 lakh < 25
lakh 10% of salary (–) rent recovered from
employee
(iii) In other cities
7.5% of salary (-) rent recovered from
employee
If accommodation taken on lease by the
employer
Lower of the following
Rent paid by the employer or
15% of salary
Less: rent recovered from the employee XXX
 (b) Valuation of use of motor car XXX
(c ) Any other perquisite XXX
6 Taxable annuity or uncommuted pension XXX
7 Taxable Commuted pension XXX
8 Taxable Gratuity XXX
9 Leave encashment XXX
10 Leave travel concession/Voluntary retirement XXX
compensation/Retrenchment compensation etc.
11 Professional tax, if paid by the employer XXX
Gross Salary XXX
Less: Standard Deduction (Rs. 50,000 or salary which ever is less) (XXX)
Less: Entertainment allowance (only for Govt. employees) (XXX)
Less: Professional Tax (XXX)
Income under the head salary XXX

SALARY, PERQUISITE AND PROFITS IN LIEU OF SALARY [SECTION 17]

The meaning of the term ‘salary’ for purposes of income tax is much wider than what is normally
understood. The term ‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary
payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities
(e.g. housing accommodation, medical facility, interest free loans etc).
Section 17(1), defined the term “Salary”. It is an inclusive definition and includes monetary as well
as non-monetary items.

Definition of Salary [Section 17(1)]

(i) wages,
(ii) any annuity or pension,
(iii) any gratuity,
(iv) any fees, commission, perquisite or profits in lieu of or in addition to any salary or
wages,
(v) any advance of salary,
(vi) any payment received in respect of any period of leave not availed by him i.e. leave
salary or leave encashment,
(vii) the portion of the annual accretion in any previous year to the balance at the credit of
an employee participating in a recognized provident fund to the extent it is taxable and
(viii) transferred balance in recognized provident fund to the extent it is taxable,
(ix) 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.
Wages:
In common parlance, the term “wages” means fixed regular payment earned for work or services.
The words “wages”, “salary”, “basic salary” are used interchangeably. Moreover, the payments in
the form of Bonus, Allowances etc. made to the employee are also included within the meaning of
salary.

Profits in lieu of Salary:

It includes the following:
(i) 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.
(ii) The amount of any compensation due to or received by an assessee from his employer or
former employer at or in connection with the modification of the terms and conditions of
employment. Usually, such compensation is treated as a capital receipt. However, by virtue
of this provision, the same is treated as a revenue receipt and is chargeable as salary.
(iii) Any payment due to or received by an assessee from his employer or former employer
from a provident or other fund, to the sum allocated by way of bonus on such policy.
(iv) Any sum received by an assessee under a keyman insurance policy including the sum
allocated by way of bonus on such policy.
(v) Any amount, whether in lumpsum or otherwise, due to the assessee or received by him, from
any person –
(a) before joining employment with that person, or
(b) after cessation of his employment with that person.
(vi) Any other sum received by the employee from the employer

Different forms of Taxability

salary
Basic salary Taxable.
D.A./pay Taxable.
Advance salary Taxable in the year of receipt
Arrears of salary Taxable in the year of receipt, if not taxed on due basis earlier.
Leave Salary 1. Government employees (only Central or State government)- fully
[Section 10(10AA)] exempt from tax.
2. Non-Government employees, exempt from tax to the extent of the
least of the following:
(a) Cash equivalent of leave salary in respect of the period of earned
leave at the credit of employee at the time of retirement (which
cannot exceed 30 days’ “average salary” for every completed year of
service); or
(b) 10 months “average salary”; or
(c) Amount specified by the Government i.e. Rs. 3,00,000 or
 (d) Leave encashment actually received at the time of retirement.
Notes –
1. “Average salary” means average salary drawn during the period of
10 months immediately preceding the retirement.
2. Fraction number of years are completely ignored. If the employee
rendered service of 5 years 10 months it will be taken as 5.
3. Leave salary received during the period of service is taxable in all
cases.
4. Where an employee has received from his previous employer cash
equivalent to his earned leave and also receives from present
employer leave encashment, the maximum limit shall be reduced by
the amount previously exempted.
5. Leave Encashment paid to legal heirs of the deceased employee at
the time of his/her death is not taxable as salary.
6. Meaning of salary: Basic salary, Conditional D.A. and commission
based on fixed percentage of turnover.
Salary in lieu of Taxable.
notice
Fees and Taxable.
commission
Bonus Taxable on receipt basis if not taxed earlier on due basis.

Gratuity 1. Government employee [Section 10(10)(i)] (Central Government or

State Government or Local authority but not employees of statutory
corporation) – fully exempt from tax.
2. Non-Government employee covered by the POGA 1972 [Section
10(10)(ii)]: Least of the following is exempt and the balance (Amt.
Received (–) Amt. Exempted) is taxable :
(a) 15 days salary** last drawn for each completed year of service in
excess of six month;
(b) Rs.20,00,000 (Increased from 10 lacs to 20 lacs by Payment of
Gratuity (Amendment) Act, 2018) ; or
(c) Gratuity actually received.
** Salary means: Basis salary + DA
3. Non-Government employee (not covered by POGA) [Section 10(10)
(iii)] exempt from tax to the extent of the least of the following:
(a) Rs. 20,00,000 (Increased from 10 lacs to 20 lacs by Payment of
Gratuity (Amendment) Act, 2018) ;
(b) Half month’s average salary** for each completed year of service; or
(c) Gratuity actually received.
**Salary means: Basis salary (average of last 10 months) + Dearness
 allowance (if provided in terms of employment) + commission as a
percentage of turnover achieved by the employee.
Average salary for this purpose is to be calculated on the basis of
average salary drawn during the period of 10 months immediately
preceding the month in which the employee has retired.
IMPORTANT NOTES:
1. Employees of a seasonal establishment: Instead of 15 days, 7 days
salary.
2. Piece rated employee: Daily wages shall be computed on the
average of the total wages received by him for a period of three
months immediately preceding the retirement.
3. Where an employee receives gratuity from two or more employers in
the same previous year, then the exemption shall not exceed the
maximum limit of Rs.20 lacs. It is very important to note that this
provision is applicable only in case of residual category of
employees covered under 10(10)(iii). It means it is not applicable in
case of employees covered by Payment of Gratuity Act.
4. Gratuity received by family members after the death of employee:–
• If gratuity becomes due during lifetime or at time of retirement of
assessee it is taxable in hands of assessee.
• If gratuity becomes due and received after death of employee it is
not taxable in hands of employee. It is also not taxable in hands
of legal heirs as it does not takes partake the character of income
in their hands but it is only a part of estate devolving upon them.
Pension  Uncommuted pension is taxable in all cases.
 Commuted pension is fully exempt from tax in the case of a
Government employee (i.e. an employee of the Central
Government, State Government, local authority and statutory
corporation). In the case of non-Government employee, commuted
pension is exempt to the extent given below –
(a) One-third of normal pension is exempt if the employee receives
gratuity or
(b) One Half of normal pensions is exempt from tax if the employee
does not receive gratuity.
Pension under new As per section 80CCD(1) if an individual employed by central
pension scheme in government or any other employer on or after 01-01-2004 has paid
the case of a or deposited any amount in a previous year in his account under a
Government NPS a deduction of such amount not exceeding 10% of his salary is
employee or any allowed.
other employee According to new provision the date of joining the service being on or
joining, on or after after 1.1.2004 is not applicable to private sector employees.
January 1, 2004
1. Employer’s contribution is first included in salary then a deduction is
 available (to the extent 14 per cent of salary) under section
80CCD(2).
2. Employee’s contribution is deductible under section 80CCD(1) to the
extent of 10 % of salary.
3. When pension is received out of the aforesaid amount, it will be
taxable in the year of receipt.
Employers contribution towards NPS is not considered for monetary
ceiling of 1.5 lakh
Notes: –
• If pension is received from United Nation Organisation (UNO) by its
employee or his family members it is not chargeable to tax.
• Family pension received by family members of armed forces is fully
exempt from tax.
• Family pension received by other employee not covered above after
death of employee is taxable in hands of recipient under other
sources after giving standard deduction of 15000 or 1/3 rd of such
pension whichever is lower
Annuity from Taxable as salary.
employer
Annual accretion 1. Excess of employer’s contribution over 12% of salary is taxable.
to the credit 2. Excess of interest over notified interest is taxable (notified rate of
balance in RPF interest is 9.5%)

Retrenchment Exempt from tax to the least of the following is exempt from tax—
compensation 1. Amount actually received;
2. Rs.5,00,000;
3. An amount calculated in accordance with Section 25F(b) of the
Industrial Disputes Act, 1947 i.e. 15 days average pay** for each
completed year of service or part thereof in excess of 6 months.
However the aforesaid limit is not applicable in cases where
compensation is paid under any scheme approved by the
government.
** Average Pay means:
1. In case of monthly payment- Average of last 3 months.
2. In case of weekly payment- Average of last four completed weeks.
3. In case of daily payment- Average of Last 12 full working days.
Compensation It applies to an employee of the company or the authority, as the case
received under may be, who has completed 10 years of service or completed 40
voluntary years of age.
retirement scheme 1. Amount Actually received
(VRS)
2. Amount specified by government i.e. Rs. 5 lakh
 3. One of the condition is the amount payable on account of voluntary
retirement or voluntary separation of the employees does not
exceed (a) the amount equivalent to three month’s salary for each
completed year of service, or (b) the salary at the time of retirement
multiplied by the balance months service left before the dated of his
retirement on superannuation, whichever is more. Relief section 89
is not available.
Salary from UNO Not chargeable to tax.

ALLOWANCES:
Allowance means the fixed sum paid by employer to employee to meet official or personal
expenses. Different types of allowances are given to employees by their employers. Generally
allowances are given to employees to meet some particular requirements like house rent, expenses
on uniform, conveyance etc. Under the Income-tax Act, 1961, allowance is taxable on due or
receipt basis, whichever is earlier. Various types of allowances normally in vogue are discussed
below:

Allowances
Fully Taxable Partly Taxable Fully Exempt
(i) Entertainment Allowance (i) House Rent Allowance [u/s (i) Allowances to High Court
10(13A)] Judges
(ii) Dearness Allowance
(ii) Special Allowances [u/s (ii) Allowance paid by the
(iii) Overtime Allowance
10(14)] United Nations
(iv) Fixed Medical Allowance Organization.
(v) City Compensatory (iii) Compensatory
Allowance (to meet Allowance received by a
increased cost of living in judge
cities)
(iv) Sumptuary allowance
(vi) Interim Allowance granted to High Court or
(vii) Servant Allowance Supreme Court Judges

(viii) Project Allowance (v) Allowance granted to

Government employees
(ix) Tiffin/Lunch/Dinner
outside India.
(x) Any other cash Allowance
(xi) Warden Allowance
(xii) Non-practicing Allowance

(A) Allowances which are fully taxable

(1) City compensatory allowance: City Compensatory Allowance is normally intended to
compensate the employees for the higher cost of living in cities. It is taxable irrespective of
the fact whether it is given as compensation for performing his duties in a particular place
or under special circumstances.
(2) Entertainment allowance: This allowance is given to employees to meet the expenses towards
hospitality in receiving customers etc. The Act gives a deduction towards entertainment
allowance only to a Government employee. In the case of government employees (only
Central Government and State Government), First included in salary and there after least of
following is deductible;
1. Rs. 5000;
2. 20 per cent of basic salary; or
3. Entertainment allowance.
(3) Non-government employees (including employees of statutory corporation and local
authority): nothing is allowed as deduction

Partially exempt or fully exempt allowances on satisfaction of the prescribed conditions

[Section 10(14)]
Certain allowances are exempt upto the amount spent for specified purposes i.e. exemption
would be lower of the actual allowance or amount spent for specified purposes –
Allowances prescribed for the purposes of section 10(14)(i)
(a) any allowance granted to meet the cost of travel on tour or on transfer (Travelling Allowance);
Explanation - “allowance granted to meet the cost of travel on transfer” includes any sum paid in
connection with the transfer, packing and transportation of personal effects on such transfer.

(b) any allowance, whether granted on tour or for the period of journey in connection with
transfer, to meet the ordinary daily charges incurred by an employee on account of absence
from his normal place of duty;
(c) any allowance granted to meet the expenditure incurred on conveyance in performance of
duties of an office or employment of profit (Conveyance Allowance);
(d) any allowance granted to meet the expenditure incurred on a helper where such helper is
engaged in the performance of the duties of an office or employment of profit (Helper
Allowance);
(e) any allowance granted for encouraging the academic research and training pursuits in
educational and research institutions;
(f) any allowance granted to meet the expenditure on the purchase or maintenance of uniform for
wear during the performance of the duties of an office or employment of profit (Uniform
Allowance).
Certain allowances are exempt upto the amount specified by Government i.e. exemption
would be lower of the actual allowance or amount specified by Government.

Sr. Name of Allowance Extent to which allowance is exempt

No.
1. Any Special Compensatory Allowance Rs. 800 or Rs. 7,00 or Rs. 300 per month
in the nature of Special depending upon the specified locations
Compensatory (Hilly Areas) Allowance
or High Altitude Allowance or
Uncongenial Climate Allowance or
Snow Bound Area Allowance or
Avalanche Allowance
2. Any Special Compensatory Allowance Rs. 1,300 or Rs. 1,100 or
in the nature of border area Rs. 1,050 or Rs. 750 or
allowance or remote locality
allowance or difficult area allowance Rs. 300 or Rs. 200 per month depending
or disturbed area allowance upon the specified locations.

3. Special Compensatory (Tribal Areas / Rs. 200 per month.

Schedule Areas / Agency Areas)
Allowance
4. Allowance for transport employees 70% of such allowance upto a maximum
of Rs. 10,000 per month.
5. Children Education Allowance Rs. 100 per month per child upto a
maximum of two children.
6. Hostel expenditure allowance Rs. 300 per month per child upto a
maximum of two children.
7. Compensatory Field Area Allowance Rs. 2,600 per month in specified areas.
8. Compensatory Modified Field Area Rs. 1,000 per month in specified areas.
Allowance
9. Transport allowance Rs. 3200 per month in the case of an
employee who is blind or orthopedically
handicapped employee with disability of
lower extremities or deaf and dump
10. Underground Allowance would be Rs. 800 per month
granted to an employee who is
working in uncongenial, unnatural
climate in underground mines. This is
applicable to whole of India.

House rent Exempt from tax to the extent of the least of the following:
allowance 1. 50 per cent of salary in Delhi Mumbai Kolkata Chennai or 40
per cent of salary in other cases;
2. House rent allowance; or
3. The excess of rent paid over 10 per cent of salary
Taxable HRA = Actual HRA – Exemption
(a) Exemption 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.
(b) Salary for this purpose means basic salary, dearness
allowance, if provided in terms of employment and
commission as a fixed percentage of turnover.
(c) Salary determined on due basis. [Explanation (ii) to rule 2A]
Mode of computation of Exemption: The exemption depends
on salary, HRA, rent paid and place where house is taken. If all
these factors are same throughout the previous year the
exemption should be calculated on “annual” basis otherwise
monthly basis.
No exemption if employee resides in his own house. Exemption
is available even if the house is owned by close relative and
for which rent is regularly paid ( Bajrang Prasad Ramdharant
v. CIT [2013] 60 SOT 66(Ahd.)

(B) Allowances which are fully exempt

(1) Allowance to High Court Judges: Any allowance paid to a Judge of a High Court under section
22A(2) of the High Court Judges (Conditions of Service) Act, 1954 is not taxable.
(2) Allowance received from United Nations Organisation (UNO): Allowance paid by the UNO to its
employees is not taxable by virtue of section 2 of the United Nations (Privileges and
Immunities) Act, 1947.
(3) Compensatory allowance under Article 222(2) of the Constitution: Compensatory allowance
received by judge under Article 222(2) of the Constitution is not taxable since it is neither
salary not perquisite.
(4) Sumptuary allowance: Sumptuary allowance given to High Court Judges under section 22C of
the High Court Judges (Conditions of Service) Act, 1954 and Supreme Court Judges under
section 23B of the Supreme Court Judges (Conditions of Service) Act, 1958 is not chargeable
to tax.
(5) Allowances payable outside India [Section 10(7)]
Allowances or perquisites paid or allowed as such outside India by the Government to a citizen of
India for services rendered outside India are exempt from tax.
Students may remember that in such cases under section 9(1)(iii), the income chargeable under the
head ‘Salaries’ is deemed to accrue in India. The residential status of the recipient will, however,
not affect this exemption.
Exemption of specified allowances and perquisites paid to Chairman or a retired Chairman or any
other member or retired member of the UPSC [Section 10(45)]
(i) Under the Income-tax Act, 1961, perquisites and allowances received by an employee are
taxable under the head “Salaries” unless they are specifically exempted.

(ii) Section 10(45) exempts specified allowances and perquisites received by Chairman or any other
member, including retired Chairman/member, of the Union Public Service Commission
(UPSC).
(iii) The exemption would be available in respect of such allowances and perquisites as may be
notified by the Central Government in this behalf.
(iv) Accordingly, the Central Government has notified the following allowances and perquisites for
serving Chairman and members of UPSC, for the purpose of exemption under section
10(45) -
(1) The value of rent free official residence,
(2) The value of conveyance facilities including transport allowance,
(3) The sumptuary allowance and
(4) The value of leave travel concession.
In case of retired Chairman and retired members of UPSC, the following have been notified for
exemption under section 10(45):
(i) A sum of maximum Rs.14,000 per month for defraying the service of an orderly and for meeting
expenses incurred towards secretarial assistance on contract basis.
(ii) the value of a residential telephone free of cost and the number of free calls to the extent of
Rs.1,500 pm (over and above free calls per month allowed by the telephone authorities)

PERQUISITES:
Perquisites are the benefits or amenities in cash or in kind, or in money or money’s worth and also
amenities which are not convertible into money, provided by the employer to the employee
whether free of cost or at a concessional rate. Their value, to the extent these go to reduce the
expenditure that the employee normally would have otherwise incurred in obtaining these benefits
and amenities, is regarded as part of the taxable salary.
Taxable Perquisites: We need to understand the valuation of perquisites. The table appended
below, summarises the taxable value of various perquisites in the hands of the employee
assessees.

Sl. Perquisite Category of Employee Value of perquisites

No.
1 Rent Free Government Employee Licence Fee determined as per the
Residential Government Rules, as reduced by
Accommodation rent actually paid by the employee
for unfurnished accommodation.
For a furnished accommodation,
10% p.a. of the furniture cost is
added to the value obtained above
for unfurnished.
In case the furniture is hired, the
actual hire charges would be added
to the value obtained above for
unfurnished.
Non-Government (a) If the accommodation is owned
Employee by the employer, the value
would be based on the
 population, i.e.,
(i) if in cities having a population of
> 25 Lacs (2001 Census) - - 15%
of Salary;
(ii) if the population is between 10
Lacs up to 25 Lacs – 10% of
Salary;
(iii) else 7.5% of Salary
(b) If the accommodation is taken
on lease by the employer, the
actual value of lease rentals
paid by the employer subject to
a maximum of 15% of Salary is
considered as Value.
For a furnished accommodation,
10% p.a. of the furniture cost is
added to the value obtained
above for unfurnished.
In case the furniture is hired, the
actual hire charges would be
added to the value obtained
above for unfurnished.
In all cases, any amount recovered
from the employee should be
reduced to arrive at the taxable
value of the perquisite
Where the accommodation is
provided by the employer in a
hotel (except where the
employee is provided such
accommodation for a period
not exceeding in aggregate 15
days on the transfer from one
place to another): The
perquisites value would be 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.
2 Interest Free / All employees Where the employer grants a loan
Concessional to an employee, exceeding INR
Loan 20000, the interest at the rate
charged by SBI, as on the first date
of the relevant PY, at maximum
outstanding monthly balance as
reduced by the Interest actually
charged to the employee; would be
the taxable value of the perquisite

3 Use of movable All employees 10% p.a. of the actual cost of the
assets by asset, if it is owned by the employer
employee / any OR the actual hire charges incurred
member of his by the employer if the asset is hired
household as reduced by the amount, if any,
paid or recovered from the
employee for such use would be the
taxable value of the perquisite.
Note: Use of laptops and computers
wouldn’t attract taxability as
perquisites.
4 Transfer of All employees If Computers / electronic items are
movable assets transferred, 50% Depreciation p.a.
(WDV) for every completed year of
usage; if Motor cars are transferred,
20% Depreciation p.a. (WDV) for
every completed year of usage; and
for all other assets transferred, 10%
Depreciation p.a. (WDV) for every
completed year of usage would be
treated as the taxable value of
perquisite net of any amount so
recovered from the employee

5 Provision of All employees The value of benefit to the

gas/electricity / employee resulting from the supply
water of gas, electric energy or water for
his household consumption shall be
determined as the sum equal to the
amount paid on that account by the
employer to the agency supplying
the gas, electric energy or water.
Where such supply is made from the
sources owned by the employer,
without purchasing them from any
other outside agency, the value of
 perquisites would be the
manufacturing cost per unit incurred
by the employer. Where the
employee is paying any amount in
respect of such services, the amount
so paid shall be deducted from the
value so arrived at.

6 Provision of free / All employees Amount actually expended by the

concessional employer net of the amount so
educational recovered. However, if the
facilities educational institution is owned by
the employer, and free educational
facilities are provided to the
employee’s children, there wouldn’t
be any perquisite as long as the
value of benefit in a month is < INR
1000. Any amount recovered from
the employee would be reduced.

7 Credit Card All employees Membership fees / Annual fees

Expenses incurred by the employer, on a card
provided to the employee, would be
the taxable value of perquisite net of
the amount, if any, recovered from
him.

8 Club expenditure All employees Cost incurred by the employer at

actual, net of recovery from the
employee would be the taxable
value of perquisite. However, in case
the employee enjoys Corporate
Membership in a club, the value of
benefit wouldn’t include the initial
membership paid by the Employer
to acquire the corporate
membership

9 Health Club, All employees No perquisite if provided uniformly

Sports, Similar by the employer to all employees
facilities

10 Sweat Equity All employees In case where, on the date of

exercising the option, the share of
the company is listed on a
recognised stock exchange, the fair
 market value (FMV) would be the
average of the opening and closing
price of the share on that date on
the said stock exchange. If the
shares of the company are listed on
more than one stock exchange, the
FMV would be the average of the
opening and closing prices of the
share on the recognised stock
exchange which records the highest
volume of trading in the share. In
case on the date of the exercising of
the option, if there was no trading in
the share, the FMV would be the
closing price on the recognised
stock exchange, on a date closest to
exercising the option, immediately
before that date, and if the shares of
the company are listed on more
than one stock exchange, the FMV
would be the closing price of the
share on the recognised stock
exchange which records the highest
volume of trading in the share.
In case the shares of the company
are not listed on any recognised
stock exchange, the FMV would be
that as determined by the Merchant
Banker on the specified date, i.e., the
date of exercising the option or any
date earlier not exceeding 180 days
prior to the date of exercise of the
option.

Motor Cars
The taxable value of use of motor cars are dealt with separately, as it is situational, as under:
Where the Expenses are met by the employer
 If the Car is owned / hired by the employer; expenses met by the employer & is used by the
employee wholly for Official purposes, there is no perquisite.
 If the Car is owned / hired by the employer; expenses met by the employer & is used by the
employee wholly for Personal purposes, the running and maintenance charges / wear &
tear / hire charges / driver’s salary would be treated as the taxable value of the perquisite
net of the amount so recovered from the employee.
  If the If the Car is owned / hired by the employer; expenses met by the employer & is used
by the employee partly for Official and partly for Personal purposes, the taxable value of the
perquisite would be based on the cc of the engine, as under:
 Up to 1.6 litres (1600 cc), the taxable value of the perquisite would be INR 1800 pm
 > 1.6 litres (1600 cc), the taxable value of the perquisite would be INR 2400 pm
 If chauffer is also provided, INR 900 pm is to be added to either of the above, depending
on the engine capacity
 If the Car is owned / hired by the employee; expenses met by the employer & is used by the
employee wholly for Official purposes, there is no perquisite.
 If the Car is owned / hired by the employee; expenses met by the employer & is used by the
employee wholly for Personal purposes, the actual expenditure so incurred would be
treated as the taxable value of the perquisite.
 If the Car is owned / hired by the employee; expenses met by the employer & is used by the
employee partly for Official and partly for Personal purposes, the taxable value of the
perquisite would be the actual expenditure incurred by the employer as reduced by the
taxable value of the perquisite determined above basis the engine capacity.
Where the Expenses are met by the employee
 If the Car is owned / hired by the employer; expenses met by the employee & is used by the
employee wholly for Official purposes, there is no perquisite
 If the Car is owned / hired by the employer; expenses met by the employee & is used by the
employee wholly for Personal purposes, the wear & tear / hire charges / driver’s salary
would be treated as the taxable value of the perquisite
 If the If the Car is owned / hired by the employer; expenses met by the employee & is used
by the employee partly for Official and partly for Personal purposes, the taxable value of the
perquisite would be based on the cc of the engine, as under:
 Up to 1.6 litres (1600cc), the taxable value of the perquisite would be INR 600 pm
 > 1.6 litres (1600cc), the taxable value of the perquisite would be INR 900 pm
 If chauffer is also provided, INR 900 pm is to be added to either of the above,
depending on the engine capacity

DEDUCTION [SECTION 16]

(I) Standard Deduction [Section 16(ia)]: Standard deduction of Rs. 50,000 (fifty thousand) or the
amount of the salary, whichever is less w.e.f. Assessment Year 2020-21.
(II) Entertainment Allowance [Section 16(ii)]: Deduction of the least of the following shall be
allowed to Government Employees only;
- 20% of basic salary;
- Rs.5000
- Actual allowance
(III) Professional Tax [Section 16(iii)]: Deduction is allowed in the year of payment. If paid by
employer, then first include in salary as a perquisite and then a deduction shall be allowed.
RELIEF [SECTION 89]:
(1) On account of arrears of salary or advance salary: Where by reason of any portion of an
assessee’s salary being paid in arrears or in advance or by reason of his having received in
any one financial year, salary for more than twelve months or a payment of profit in lieu of
salary under section 17(3), his income is assessed at a rate higher than that at which it
would otherwise have been assessed, the Assessing Officer shall, on an application made to
him in this behalf, grant such relief as prescribed. The procedure for computing the relief is
given in Rule 21A.
(2) On account of family pension: Similar tax relief is extended to assessees who receive arrears of
family pension as defined in the Explanation to clause (iia) of section 57.
“Family pension” means a regular monthly amount payable by the employer to a person
belonging to the family of an employee in the event of his death.
No relief at the time of Voluntary retirement or termination of service: No relief shall be
granted in respect of any amount received or receivable by an assessee on his voluntary retirement
or termination of his service, in accordance with any scheme or schemes of voluntary retirement or
a scheme of voluntary separation (in the case of a public sector company), if exemption under
section 10(10C) in respect of such compensation received on voluntary retirement or termination
of his service or voluntary separation has been claimed by the assessee in respect of the same
assessment year or any other assessment year.
 Computation of Income under the Head of House Property
[Section 22 to 27]

INTRODUCTION:
Income from house property is one of the important heads of income under the Income Tax Act.
The tax payers have been, in particular, keen to know about the exemptions and deductions
available to them on repayment of interest and principal of the loan obtained to purchase the
house property, if that house property is let out or self-occupied. The amount of interest on
borrowed capital of the current year is available under the head house property further repayment
of principal is available under section 8oC to Individuals and Hindu Undivided Families. Tax levied
under section 22 is based on Principle of Mutuality i.e. tax on income from house property and it is
not a tax on house property.

BASIS OF CHARGE [SECTION 22]

If all the following three conditions are satisfied then the property income will be chargeable to tax
under the head Income from House Property.
1. Property should consist of any BUILDING* or land appurtenant (means land connected with the
building like garden, garage etc.) thereto.
*Building means a permanent structure made of bricks, stones, concrete etc. and which has a
foundation, walls and doors. It does not include temporary structures.
2. Assessee must be the owner of the property.
Notes:
• Assessee need not to be a Registered owner.
• Ownership includes both leasehold and freehold rights and also includes deemed
ownership.[Section 27]
• Assessee must be owner of the property during the previous year. It is not material
whether he is the owner in the Assessment Year.
• If the title of the ownership of the property is under dispute in a court of law, the decision
as to who will be the owner chargeable to income-tax under section 22 will be of the
Income-tax Department till the court gives its decision to the suit filed in respect of
such property.
3. The property should not be used by the owner for the purpose of any business or profession
carried on by him, the profit of which is chargeable to tax. The income earned by an assessee
engaged in the business of letting out of properties on rent would also be taxable as business
income and not as income from house property [Rayala Corporation (P) Ltd. v. Asstt. CIT (SC)
(2016) 386 ITR 500].
If all the above three conditions are satisfied then the property income will be chargeable to
tax under the head Income from House Property.
Points to remember:
1. Income from subletting of house property will be taxable under the head “Income from other
Sources”.
2. Income from vacant plot is taxable under the head “Income from other Sources”.
3. Income from display of advertisement on the roof of building will be taxable under the head
income from other sources and not under the head house property because section 22 conditions
are not satisfied.

Exceptions:
•Income from letting out a vacant land is chargeable to tax under the head “Income From Other
Sources”
•Income earned by an assessee who is engaged in the business of letting out properties on rent,
would be chargeable to tax under the head “Profits / Gains from Business / Profession”

CASES WHERE INCOME FROM HOUSE PROPERTY IS EXEMPT FROM TAX:

Sr. Section Particulars
No.
1 10(1) read with Income from any farm house forming part of agricultural income.
section. 2(1A)(c)
2 10(19A) Annual value of any one palace in the occupation of an ex-ruler.
(If the ex-ruler has a house property which partly let out and partly
self-occupied, then only the self-occupied part of the house
property shall be exempted)
3 10(20) Income from house property of a local authority.
4 10(21) Income from house property of an approved scientific research
association.
5 10(23B) Institution for development of khadi and village industries.
6 10(23BB) Khadi and Village Industries Board.
7 10(23BBA) A body or Authority for administering religious or charitable trusts or
endowments
8 10(23C) Property income of universities, educational institutions, etc.
9 10(24) Property income of any registered trade union.
10 10(26B) Statutory Corporation or an institution/ Association financed by the
government for promoting the interest of members of SC or ST
11 10(27) Co-operative Society for promoting the interest of the members of
SC or ST
12 11 Income from house property held for charitable or religious purpose.
13 13A Property income of any political party.
14 22 Property used for own business or profession
15 23(2) One self-occupied property of an individual/HUF
COMPUTATION INCOME FROM HOUSE PROPERTY (LETOUT):

Particulars Amount Amount

(a) Fair Rent xx
(b) Municipal Valuation xx
(a or b) whichever is higher xx
(c) Standard Rent xx
(c or d) whichever is less is Expected Rent [ER] xx
Actual Rent Received
xx
Gross Annual Value (GAV) xx
Higher of Expected Rent or Actual Rent Received xx xx
Less: Property taxes paid to local authority
Net Annual Value (NAV) xx (xx)
Less: Deductions u/s. 24 - xx xxx
a) 30% of the net annual value (xx)
b) Interest on capital borrowed (loans) paid or (xx)
payable
Income from house property(computed) XXXX

COMPUTATION INCOME FROM HOUSE PROPERTY (SELF OCCUPIED):

Particulars Amount
Annual value under section 23(2) Nil
Less: Deduction under section 24
Interest on borrowed capital
(i) Interest on loan taken for acquisition or construction of house XX
on or after 1.4.99 and same was completed within 5 years
from the end of the financial year in which capital was
borrowed, interest or aggregate interest paid or payable
subject to a maximum of Rs. 2,00,000 (including apportioned
pre-construction interest).
(ii) In case of loan for acquisition or construction taken prior to
1.4.99 or loan taken for repair, renovation or reconstruction at
any point of time, interest or aggregate interest paid or
payable subject to a maximum of Rs. 30,000.
Aggregate of the amounts of deduction under (i) & (ii) shall not
exceed Rs. 2,00,000 [Inserted by Finance (No. 1) Act, 2019]
Income from house property XX
PROBLEMS ON SALARY COMPUTATION:

Problem-1 Mr. Kumar age 45 years is an employee of Forex Ltd, Delhi. He receives the
following receipts from his employer during the Financial Year 2021-22.

Particulars Amount ₹
Basic Salary 35,000 p.m.
Bonus 24,000 p.a.
Dearness Allowance 2,000 p.m.
(40% forming part of all retirement benefits)
House Rent Allowance (Rent paid ₹ 25,000 p.m.) 20,000 p.m.
Children Education Allowance (for 2 children) 250 p.m.
Transport Allowance 300 p.m.
Servent Allowance 1,200 p.m.
Assistant Allowance 3,000 p.m.
(Actal expenditure ₹ 1,500 p.m.)
City Compensatory Allowance 2,000 p.m.
Medical Allowance 1,000 p.m.

Compute the Taxable Salary for Assessment Year 2022-23.

Solution

Computation of Income from Salary of

Mr. Kumar for A.Y. 2022-23 (F.Y. 2021-22)

Particulars Amount ₹ Amount ₹

Basic Salary (₹ 35,000 x 12) 4,20,000
Bonus 24,000
Dearness Allowance (₹ 2,000 x 12) 24,000
House Rent Allowance (₹ 20,000 x12) 2,40,000
Less: Exempt (working note 1) 2,14,800 25,200
Children Education Allowance (₹ 250 x 12) 3,000
Less: Exempt ( ₹ 100 x 12 x 2) 2,400 600
Transport Allowance (₹ 300 x 12) 3,600
Less: Exempt Nil 3,600
Servant Allowance (₹ 1,200 x 12) 14,400
Assistant Allowance (₹ 3,000 x 12) 36,000
Less: Exempt (₹ 1,500 x 12) 18,000 18,000
City Compensatory Allowance (₹ 2,000 x 12) 24,000
Medical Allowance (₹ 1,000 x 12) 12,000
Gross Taxable Salary 5,65,800
Less: Deduction under section 16
Standard Deduction 50,000
Net Taxable Salary 5,15,800
Working Note:
House Rent Allowance-
a) HRA Actually Received ₹ 2,40,000
b) Rent Paid – 10% of salary
₹ 3,00,000 - ₹ 42,560 = ₹ 2,57,040
c) 50% of the salary ₹ 2,14,800
Salary for the Purpose – Basic Salary + D.A. forming part of all retirement benefits
₹ 4,20,000 + (40% of ₹ 24,000 = ₹ 9,600)
₹ 4,20,000 + 9,600 = ₹ 4,29,600

Problem-2 Mr. Raj is an employee of HCL Ltd, Hydrabad. He receives the following receipts
from his employer during the Financial Year 2021-22.

Particulars Amount ₹
Basic Pay 12,000
Dearness Allowance 5,000
Interest credited to balance in RPF @ 9.5% 28,500
Rent free house at Delhi
Rent paid by the company 5,000
Professional Tax paid by the employer 120
Motor Car 1,600cc (owned by the employer company) 2,000
Driver 9,000
commission 1,000
Motor Car is used partly for official and partly private purpose.
Compute the Taxable Salary for Assessment Year 2022-23.

Solution Computation of Income from Salary of

Mr. Raj for A.Y. 2022-23 (F.Y. 2021-22)

Particulars Amount ₹ Amount ₹

Basic Salary (₹ 12,000 x 12) 1,44,000
Dearness Allowance (₹ 5,000 x 12) 60,000
Commission (₹ 1,000 x12) 12,000
Interest credited on balance in RPF account @ 9.5% 28,500
Less: Exempt (upto 9.5%) 28500 Nil
Rent free house (working note 1) 37,476
Professional Tax paid by employer (120 x 12) 1,440
Motor Car (1,800 x 12) 21,660
Driver (900 x 12) 10,800
Gross Salary 2,87,316
Less: Deduction U/S 16
Standard Deduction 50,000
Net Taxable Salary 2,37,316
Working Notes:
Rent Free Unfurnished House:
Least of following is taxable value of perquisites
a) 15% of Salary (Basic pay + Dearness Allowance + Commission + Professional Tax paid by
the employer + Motor Car + Driver)
=(₹ 144000 + ₹ 60000 + ₹ 12000 + ₹1440 + ₹ 21600 + ₹ 10800 = ₹ 249800 x 150/100
=₹ 37476
b) Lease rent paid by the employer = ₹ 5000 x 12 = ₹ 60000.

Problem-3 Ms. Sweta is providing her salary details for the purpose of compution of Net
Taxable Salary for A.Y. 2022-23

Particulars Amount ₹
Basic Pay 240000
Commission 103000
House Rent Allowance (Rent Paid ₹ 36,000) 38000
Dearness Allowance (forming part of all retirement benefits 120000
Motor Car of 110cc provided by the company for office use 40000
Interest free loan for buying a house on 1 March 2022
st
400000
(SBI Lending rate of interest 11.5%)
RPF contribution by Ms. Shweta and same by the employer 45000
Interest credited to balance of ₹ 1,25,000 15000
Compute the Taxable Salary for Assessment Year 2022-23.

Solution Computation of Income from Salary of

Ms. Sweta for A.Y. 2022-23 (F.Y. 2021-22)

Particulars Amount ₹ Amount ₹

Basic Salary 240000
Commission 103000
Dearness Allowance 120000
House Rent Allowance 38000
Less : Exempt (working note 1) Nil 38000
Value of Motor Car Nil
Interest on Loand 3833
RPF Contribution by Employer 45000
Less: Exempt (working note 2) 45000 Nil
Interest on RPF 15000
Less: Exempt (9.5% of 125000) 11875 3125
Gross Salary 5,07,958
Less: Deduction U/S 16
Standard Deduction 50,000
Net Taxable Salary 4,57,958