Introduction

Salary in common language means a fixed payment made periodically as compensation

for regular services rendered. It covers wages paid for manual work, salary paid for clerical jobs
and remuneration paid to executives and managers. It includes all sums paid by an employee by
way of Basic Salary, Allowances, Perquisites etc. In other words salary means the remuneration
received by an employee from employer for services rendered.Salary means remuneration
received by a person from his employer for rendering personal services to him under an expressed
or implied contract of employment or service. It implies the existence of employeremployee relationship between the payer of income and receiver of income. The services must be
rendered in the capacity of an employer and not in any other capacity. For example, services
rendered by professionals like doctors, architects, lawyers etc. to their clients are not as employees
but in the course of their profession. Accordingly, fees received by them will not be covered under
the head salaries but under the head profits and gains from business or profession. By contrast
a doctor in employment with a hospital will be an employee and his salary will be covered under
this head.

BASIS OF CHARGE
According to section 15, the following income shall be chargeable to tax under the head
Salaries.
Any salary due from an employer or former employer to an assessee in the previous year,
whether paid or not.
Any salary paid or allowed to him, in the previous year, by or on behalf an employer or
former employer, though not due or before it became due to him.
Any arrears of salary paid or allowed in the previous year, by or on behalf of employer or
former employer, if not charged to income-tax in any earlier previous year.
Salary income is chargeable to tax on DUE OR RECEIPT BASIS WHICHEVER IS EARLIER .

Meaning & Definition of Salary.

MEANING: 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. Before one proceeds for Computation of
Income under the head Salaries one must understand the Meaning of Salary with reference
to the Income Tax Act 1961. Salary under the Act is defined U/s 17(1), which includes the
following:DEFINITION: According to Section 17(1) Salary includes1. Wages and salaries including advance of salary
2. Annuity or Pension
3. Any Fees and Commission
4. Any Gratuity
5. Perquisites
6. Profit in lieu of salary or in addition to salary or wages.
7. Any payment received by an employee in respect of any period of leave
not availed by him, known as leave encashment
8. Transferred balance in a recognized provident fund to the extent it is taxable;
9. Contribution made by Central Government, or any other employer in the account of an
employee under a pension scheme.
10. Annual accretion to the balance at the credit of an employee participating in a
recognized provident fund to the extent it is taxable.

PERQUISITES u/s 17(2)

It is a personal advantage or benefit derived by virtue of employment office or position. A
perquisite denotes an additional monetary benefit going into pocket or enriching the employee.
Some perquisites are taxable while some are not taxable. The taxable perquisites should be
included in salary income.

NON-TAXABLE PERQUISITES:
1.

Leave Travel Concession subject to conditions & actual spent only for travels.

2.

Computer/ Laptop provided for official / personal use.

3.

Initial Fees paid for corporate membership of a club.

4.

Refreshment provided by the Employer during working hours in office premises.

5.

Payment of annual premium on Personal Accident Policy.

6.

Subscription to periodicals and journal required for discharge of work.

7.

Provision of Medical Facilities.

8.

Gift not exceeding Rs.5000 p.a.

9.

Use of Health Club, Sports facility.

10. Free telephones whether fixed or mobile phones.

11. Interest Free / concessional loan of an amount not exceeding Rs.20000 (limit not application
in case of medical treatment)
12. Contribution to recognised Provident Fund / approved super annuation fund, pension or
deferred annuity scheme & staff group insurance scheme.
13. Free meal provided during working hours or through paid non-transferable vouchers not
exceeding Rs.50 per meal or free meal provided during working hours in a remote area.
The value of any benefit provided free or at a concessional rate (including goods sold at
concessional rate) by a company to the Employees by way of allotment of shares etc., under the
Employees stock option plan as per Central Government Guidelines.

TAXABLE PERQUISITES:
1. Rent Free Accommodation
2. Provision of Motor Car or any other Conveyance for personal use of Employee.
3. Provision of Free or Concessional Education Facilities.
4. Reimbursement of Medical Expenditure.
5. Expenditure on Foreign Travel and stay during medical expenditure.
6. Supply of Gas, Electricity & Water.
7. Sale of an Asset to the Employee at concessional price including sale of Share in the
Employer Company.

Perquisites which are tax free for all the employees

Section 17 specifically states the some benefits will not be taxed at all in the hand of the
employees and as such they are exempt from income tax .these perquisites are given below:

a. Medical benefits within India :

Medical benefits within India which are exempt from tax include the following:
a) Medical treatment provided to an employee or any member of his family in a hospital
maintained by the employer.
b) Any sum paid by the employer in respect of any expenditure incurred by the employee on
medical treatment of himself and members of his family:
(i) In a hospital maintained by government or local authority or approved by the government for
medical treatment of its employees.
(ii) In respect of the prescribed diseases or ailments in any hospital approved by the Chief
Commissioner.
c) If the ordinary medical treatment of the employee or any member of his family is done at any
private hospital, nursing home or clinic, the exemption is restricted to Rs.15, 000.

b. Medical benefits outside India

Medical Treatment outside India which is exempt from tax includes the following:
a) Any expenditure incurred by employer on the medical treatment of the employee or any
member of his family outside India.
b) Any expenditure incurred by employer on travel and stay abroad of the patient (employee or
member of his family) and one attendant who accompanies the patient in connection with such
treatment, shall be exempt to the following extent :

(i) The expenditure on medical treatment and stay abroad shall be exempt to the extent permitted
by the Reserve Bank of India.
(ii) The expenditure on travel shall be exempt in full provided the gross total income of the
employee (including this expenditure) does not exceed Rs.200000.
c. Medical Health Insurance within India
Following are exempted perquisites in respect of Medical Health Insurance
Premium paid by the employer on health insurance of the employee under an approved scheme
u/s 36(1)(ib).
Premium on insurance of health of an employee or his family members paid by employer on any
scheme approved u/s 80D (Mediclaim).
d. ESOP or Sweat Equity
Any benefit provided by a company free of cost or at a concessional rate to its employees by way
of allotment of shares, debentures or warrants directly or indirectly under any Employees Stock
Option Plan or Scheme ESOP/ESOS of the company offered to such employees in accordance
with the guidelines issued in this behalf by the Central Government. However, the difference
between the fair Market Value and the issue price will be treated, when such equity is issued at
concessional price, as the taxable perquisite value of ESOP
e. Transport

Amenity or benefit granted or provided free of cost or at concessional rate for use of any vehicle
provided by a company or an employer for journey by the assessee from his residence to his office
or other place of work, or from such office or place to his residence,
f. Refreshments
Refreshment provided by an employer to the employee during working hours in office
environment
g. Others:
a. Value of Leave Travel Concession in India.
b. Amount spent by the employer as its contribution to staff welfare schemes.
c. Laptops and computers provided for personal use.
d. Rent free official accommodation provided to a Judge of
High Court or Supreme Court or an official of Parliament including Minister and Leader of
Opposition in Parliament.
e. Recreational facilities extended not to a particular employee but to a class of employees.
f. Amount spent on training of employee or fees paid for refresher course.
g. Telephone provided to an employee at his residence.
h. Goods manufactured by the employer sold to employees at concessional rates
i. Allowances to employees of UNO
Since FBT has been discontinued, value of cars and other perquisites will be taxable in the hands
of the employees.

Perquisites taxable in case of Specified Employees only

U/s 17(2)(iii) the value of any benefit or amenity granted or provided free of cost or at
concessional rate Specified Employees only will be taxable and Specified Employees means an
employee who is a director of or who has a substantial interest i.e. more than 20 % voting power
in the company; where he is employed or
Any other employee (of any employer including a company) whose income [under the head
Salaries exceeds fifty thousand rupees
Salary for this purpose means salary due from, or paid or allowed by, one or more employers,
exclusive of the value of all benefits or amenities not provided for by way of monetary payment,

The following perquisites are taxable in case of such employees:

1. Free supply of gas, electricity or water supply for household consumption
2. Free or concessional educational facilities to the members of employees household
3. Free or concessional transport facilities
4. Sweeper, watchman, gardener and personal attendant
5. Any other benefit or amenity

Profits in Lieu of Salary u/s 17(3)

1. Compensation for Termination of Employment or modification of Terms & Conditions

The amount of any compensation due to or received by an assessee from his employer or
former employer at or in connection with the termination of his employment or the modification
of the terms and conditions relating thereto;
2. Payment from Employer from PF or Other Fund
Any payment (other than any pension, gratuity, HRA, Retrenchment compensation, etc)
due to or received by an assessee from an employer or a former employer or from a provident or
other fund , to the extent to which it does not consist of contributions by the assessee or interest
on such contributions.
3. Keyman Insurance Policy
Any sum received under a Keyman insurance policy including the sum allocated by way
of bonus on such policy.
4. Sums Received from Future or Former Employer
Any amount due to or received, whether in lump sum or otherwise, by any assessee from
any person (A) before his joining any employment with that person; or (B) after cessation of his
employment with that person.
5. Payment of Employees Obligation Employer
Any sum paid by the employer in respect of any obligation which, but for such payment,
would have been payable by the assessee;
6. Payments from Certain Funds :
Any sum payable by the employer, whether directly or through a fund, other than a
recognised provident fund or an approved superannuation fund or a Deposit-linked Insurance
Fund established u/s 3G of the Coal Mines Provident Fund and Miscellaneous Provisions Act,

1948 or u/s 6C of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 to
effect an assurance on the life of the assessee or to effect a contract for an annuity;

7. Treatment of Annual Accretion to Provident Fund;

Provident Funds are established to provide for the retirement benefits of the employees.
The Scheme of funds envisages annual contributions from both the employer and the employee
and the accumulation of interest on the balances. The funds are of three
I.
II.

Statutory Provident Fund set up or established & administered by the Government.

Recognised Provident Fund set up by others but recognized by the Commissioner

III.

of Income Tax.
Unrecognised Provident Fund set up by others but not.

MEDICAL TREATMENT ABROAD (for the patient and the attendant)

If the employee underwent medical treatment abroad and the expenditure is met by the
employer, the exemption will be subject to the following:
1.

Medical treatment and stay expenses abroad (both for the patient and the attendant) is

exempt from tax, subject to the maximum amount permitted by the Reserve Bank of India.
2. Travel expenditure of the patient and the attendant:

Gross Total Income, before including reimbursement of

Amount of Exemption

Foreign Travel Expenditure

Upto Rs.200000

Fully exempted

Above Rs.200000

Fully taxable

Value of Unfurnished Accomodation: Explanation 1 to Sec.17(2), Rule 3(1)

Nature of Perquisite

Taxable Value of Perquisite

Provided by Central Govt. or State Govt.

Licence fee determined by the Government

Less: Rent recovered from employee

Provided by Employer other than Central or State Government

(a)

owned by employer

In cities having population exceeding 25 lakhs as

per 2001 census:
5% of Salary Less Rent actually paid by employee
In cities having population exceeding 10 lakhs but not
exceeding
25 lakhs as per 2001 census:
10% of Salary Less Rent actually paid by employee In
other places: 7.5% of Salary
Less Rent actually paid by employee

(b) taken on lease by the

Rent paid by the employer or 15% of Salary

employer

whichever is lower
Less Rent recovered from employee

(c) Accommodation in a hotel

24% of salary paid/payable or actual charges

paid/payable whichever is lower
Less Amount paid or payable by the employee

Hotel Accommodation :
Accommodation provided in a hotel will not be a taxable perquisite if the following two
conditions are fulfilled:
a. The period of such accommodation does not exceed 15 days
b. Such accommodation has been provided on the transfer of the
employees from one place to another.
Value of Furnished Accommodation
Particulars
Value of unfurnished accommodation as above

`
xxx

Add : Value of Furniture provided:

xxx

Less: Any charges paid or payable by the employee

(xxx)

Value of Furnished Accommodation

xxx

Note : Furniture includes Television sets, radio, refrigerator, other household appliance,
air-conditioning plant or equipment.

Valuation not applicable

1.

Employees working at mining site, onshore oil exploration site, offshore site, project
execution site, dam site, power generation site.

2. Conditions to be fulfilled:
a) The accommodation should be of a temporary nature, and
b) Plinth area should not exceed 800 square feet
c) Accommodation should be located at least 8 kms away from local limits of
municipality/cantonment or located in a remote area.
Remote area means area located at least 40 kms away from town having a population not
exceeding 20,000 based on latest published All-India census.
Valuation of accommodation in case of Employees on transfer
1.

For the first 90 days of transfer: Where accommodation is provided both at existing
place of work and in new place, the accommodation, which has lower value, shall be
taxable.

2. After 90 days both accommodations shall be taxable.

Salary for Valuation of Accommodation facilities
Salary includes
Basic Salary

Salary excludes
Other D.A

D.A. (if considered for retirement

Employers contribution to PF

benefits)

Advance Salary [Sec.17 (1)(v)]

Advance salary is taxable on receipt basis, in the assessment year relevant to the previous
year in which it is received, irrespective of the incidence of tax in the hands of the employee.
The recipient can, however, claim relief in terms of section 89. However, a loan taken from
employer is not taxable as advance tax salary.

Leave salary
As per Service rules every employee is entitled to certain no. of leaves per annum. If an
employee does not utilize all his leaves available to him per annum such unutilized either get lapsed or
get carry forward which can be enchased later. If such carry forward leaves are liquidated in cash form
during the continuity of employment or on retirement, it is known as leave salary.
The taxation of Leave salary for various categories of employees is shown here under:

Status of Employee

Nature of Leave
Encashment

Taxability

Government/ NonGovernment
employee

Leave encashment during

Continuity of
employment

It is chargeable to tax. However

relief can be taken under section
89

Government
employee

Leave encashment at the

time of retirement /
leaving job

It is fully exempt from tax under

section 10(10AA)(i)

Non-Government
employee

Leave encashment at the

time of retirement /
leaving job

It is fully or partially exempt

from tax in some cases under
section 10(10AA)(ii)

In Simple words from the above tabloid summary we can conclude that Leave Salary is
chargeable to tax only in two cases first accumulated leave being enchased by any class of
employee- Govt. or Non Govt. during the continuation of employment whereof it is fully
chargeable to tax.

Second being accumulated leaves enchased by a non govt. employee on his/ her retirement
whereof the complicated part of calculation of exempted leave salary comes into picture which
can be calculated as LEAST of the following:

1.

Period of earned leave (in no. of months) to the credit of the employee at the
time of his retirement leaving the job Average monthly salary.

2.

10 Average monthly salary.

3.

The amount specified by the Government i.e., Rs. 300000 /-;

4.

Leave encashment actually received at the time of retirement.

EXEMPTIONS u/s 10 IN RESPECT OF SALARY HEAD

Various items of Salary for which exemptions are available subject to limitations :
1. Leave travel assistance (lTA) u/s 10(5) rule 2b
2. House rent allowance [sec. 10(13a) rule 2a]
3. Children education allowance
4. Children hostel expenditure allowance
5. Running allowance
6. Transport allowance
7. Gratuity
8. Pension
9. Leave encashment
10. Retrenchment compensation
11. Voluntary retirement compensation

1. LEAVE TRAVEL CONCESSION [SECTION 10(5)]

Leave Travel Concession is exempt to the following extent:
In case of an individual
The value of any travel concession or assistance received by or due by him.
From his employer for himself and his family, in connection with his proceeding on
leave to any place in India.
Or, from his employer or former employer for himself and his family, for proceeding to
any place in India after retirement from service or after termination of his service.
Subject to the conditions prescribed as to the number of journeys and amount exempt
per head.
Family of the individuals includes:
His spouse and children and
His parents, brothers and sisters who are mainly dependent upon him.
The amount of exemption is limited to the actual expenses incurred for the travel.

2. PENSION
1. Taxability of Uncommuted Pension or Monthly Pension:
(a) Pension is received periodically by the retired employee
(b) It may be received by Government or non-government employees
(c) Amount received shall be fully taxable under the head salaries
2. Taxability of Commuted Pension:
(a) Pension is received in lumpsum as per the terms of the employment on
retirement or superannuation.
(b) Full Value of Commuted Pension = Amount received on commutation /
percentage of commutation.

(c) Taxability:

Recipient

Amount Taxable

Government employee(Central/

Fully exempted u/s 10(10A)(i)

State/Local Authority or Statutory

Corporation)
Non-Govt. employee who has also

Amount Received

received Gratuity u/s 10(10A)(ii)

Less: 1/3 of Full Value of Commuted

Pension

Non-Govt. employee who has not

Amount Received

received Gratuity u/s 10(10A)(iii)

Less:1/2 of Full Value of Commuted Pension.

4. GRATUITY
GOVERNMENT EMPLOYEE
Fully exempted from tax u/s 10(10)(i).
Employee covered by payment of Gratuity Act,1972
Amount Received as Gratuity

xxx

Less: Exemption u/s 10(10)(ii)

Least of the followings:
a) Actual amount received

xxx

b) 15/26 Last drawn salary No. of years of

completed service or part thereof in excess of 6 months

xxx

c) Maximum Limit

1000000

Taxable Gratuity

xxx

Note: Salary = Basic Pay + Dearness Allowance

In case of seasonal employment, instead of 15 days, 7 days shall be considered.
NON GOVERNMENT EMPLOYEES
Employee not covered by payment of Gratuity Act,1972
Amount Received as Gratuity

xxx

Less: Exemption u/s 10(10)(ii)

Least of the followings:
a) Actual amount received

xxx

b) 1/2 Average salary No. of fully completed years

of

xxx
service

c) Maximum Limit

1000000

Taxable Gratuity

xxx

Note: Salary =
10 months average salary preceeding the month of retirement.
= Basic Pay + Dearness Allowance considered for retirement benefits + commission (if
received as a fixed percentage on turnover)

Very Important :

1. Where an individual receives retirement gratuity from more than one employer, he can claim
exemption in respect of both of them.
2. However, the maximum amount of exemption should not exceed Rs.350000.
3. When gratuity is received from more than one employer during different periods of time, the
maximum exemption claimed by an assessee during his entire life should not exceed Rs.350000.

5. HOUSE RENT ALLOWANCE [Sec. 10(13A) Rule 2A]

Conditions for claiming exemption:
1. Assessee is in receipt of HRA
2. Pays rent
3. Rent paid is more than 10% of salary.
Very Important:
1. The exemption shall be calculated on the basis of where the accommodation is situated.
2. If the place of employment is the same for the whole year, then exemption shall be calculated for the
whole year.
3. If there is a change in place during the previous year, then it will be calculated on a monthly basis
4. Exemption should be calculated in respect of the period during which rental accommodation is
occupied by the employee during the previous year.
5. Salary for the period during which rental accommodation is not occupied shall not be considered.

Salary for HRA= Basic Pay + DA (considered for retirement benefits) + Commission ( if received as a
fixed percentage on turnover as per terms of
employment)

Taxable HRA:

PARTICULARS

Rs.

Amount received during the financial year for HRA

Rs.
xxx

Less: Exemption u/s 10(13A) Rule 2A Least of the

followings:

xxx

Actual amount received

xxx

50% (for metro cities) / 40% of Salary for other places)

Rent paid less 10% of Salary

xxx

Taxable HRA

xxx

6. LEAVE ENCASHMENT
1. Leave encashment while in service is fully taxable as income of previous year in which it is
encashed.
2. Leave encashment on retirement: if an individual receives leave encashment on his retirement, then
the amount received will be eligible for exemption. The amount of exemption is based on his
employment:
a. Government employee: fully exempted from tax
b. Non-Govt. employee: An individual who is not a Government employee is also entitled for
exemption in respect of Leave Encashment compensation received by him.

Computation of exemption from Leave Encashment:

Step 1 : Computation of Salary = 10 months average salary preceeding the month of retirement.
Step 2 : Salary = Basic Pay + Dearness Allowance (forming a part of salary for retirement benefits) +
Commission (if received as a fixed percentage on turnover)
Step3 : This calculation is only applicable where the employer has sanctioned leave to the employee in
excess of 30 days for every completed year of service.
PARTICULARS

Rs.

(i) Leave credit available on the date of retirement

xxx

Less: Excess leave sanctioned by the employer

xxx

(Leave sanctioned by the employer per year 30 days per year) No. of
completed years of service)
Leave credit on the basis of 30 days credit for completed years of service

xxx

(ii) Leave salary on the basis of 30 days credit = Step (i) x Step 1

xxx

Note: In case the employer sanctioned leave of 30 days or less for completed year of service then the
salary for actual leave balance shall be considered and Step (i) shall not apply.

Taxable Leave Salary on Retirement

PARTICULARS
Amount Received on Leave Encashment
Less: Exemption u/s 10(10AA)
Least of the followings:

Rs.

Rs.
xxx

i. Actual amount of Leave encashment received

xxx

ii. Average salary of the individual for the past 10 months 10 months
iii. Maximum Limit

30000
0

iv. Leave at credit at the rate of 30 days p.a. for every Completed year

xxx

of service as calculated in (ii)

Taxable Value of Leave Encashment

xxx

Note: (a) If the individual receives leave encashment from more than one employer, the quantum of
exemption will be computed independently in respect of each employer.
(b) The total amount of exemption should not exceed Rs.300000 during his life time.

7. RETRENCHMENT COMPENSATION

Compensation is received by a workman at the time of:

1. Closing down of the undertaking.
2. Transfer (irrespective of by agreement/compulsory acquisition) if the following conditions are
satisfied:
a. Service of workmen interrupted by transfer
b. Terms and conditions of employment after transfer are less favourable
c. New employer is not under a legal obligation whether under the terms of transfer or otherwise to pay
compensation on the basis that the employees service has been continuous and has not been
interrupted by transfer.
Note: (a) Retrenchment compensation received in accordance with any scheme, which is approved
by the Central Government, is fully exempt from tax.
(b) An individual who receives retrenchment compensation, is entitled for exemption u/s 10(10B).

Computation of Taxable Retrenchment Compensation :

xxx

Amount received as Retrenchment Compensation

Less: Exemption u/s 10(10B):
Least of the followings:
(i) Actual amount received

xxx

(ii) Amount determined under the Industrial Disputes Act,1947

xxx

(iii) Maximum Limit

500000

Taxable Value

xxx

8. VOLUNTARY RETIREMENT COMPENSATION

Conditions for claiming exemption:
1. An individual, who has retired under the Voluntary Retirement scheme, should not be
employed in another company of the same management.
2. He should not have received any other Voluntary Retirement Compensation
before from any other employer and claimed exemption.
3. Exemption u/s 10(10C) in respect of Compensation under VRS can be availed by an
Individual only once in his lifetime.

Computation of Exemption:
Step 1: Salary = Last drawn salary = Basic Pay + D.A.(considered for retirement benefits
Step 2: Taxable VRS compensation

Particulars

Rs.

Rs.

Amount received as VRS Compensation

xxx

Less: Exemption u/s 10(10C):

xxx

Least of the followings:

xxx

(i) Actual amount received

500000

(ii) Maximum Limit

(iii) The highest of the following:
Last drawn salary 3 No. of fully completed years of service

xxx

Last drawn salary Balance of no. of months of service left.

Taxable Value

xxx

PROVIDENT FUNDS

Particulars

Statutory

Recognized

Unrecognized

Public

Constituted

Provident

Under

Funds
Act, 1952

EPF and Misc,

Provisions Act,
1952 & recognized
by the Commissioner
of

Not recognized by Public

the Commissioner
of Income Tax

Provident
Fund Act,1968
Account in SBI

PF and CIT

or
Post Offices

Contr ibut io n by Employer

an d

Employer and

Employer and

All assessees

Employee

Employee

Independently

Deduction u/s 80C

No Income Tax

Deduction u/s

Benefit

80C

Employee
Assessees

Deduction u/s

Contribution

80C

Employers

Not taxable

Contribution
Interest credited

Amount exceeding
12% of salary is
taxable

Not taxable at the Not applicable

time of contribution

Fully

Exempted up to

On Employees

exempted

9.5% p.a. Any

excess is taxable

contribution
taxable under the
head Other

Withdrawal at

Exempted u/s

Exempted u/s

Employees

Exempted u/s

the time of

10(11)

10(12) Subject to
conditions

contribution and
interest thereon is
not taxable.
Employers

10(11)

retirement /
resignation /

Fully exempt

Note: Sum received by an Employee under approved Superannuation Fund is also exempt from tax
u/s 10(13).

Special Allowance 10(14):

Allowance is defined as a fixed quantity of money or other substance given regularly

in addition to salary for meeting specific requirements of the employees. As a general
rule, all allowances are to be included in the total income unless specifically exempted.
Exemption in respect of following allowances is allowable to the extent mentioned
against each:House Rent Allowance :- Provided that expenditure on rent is actually incurred,
exemption available shall be the least of the following :
(i)
(ii)
(iii)

HRA received.
Rent paid less 10% of salary.
40% of Salary (50% in case of Mumbai, Chennai, Kolkata, Delhi) Salary

here means Basic + Dearness Allowance, if dearness allowance is provided by the

terms of employment.
Leave Travel Allowance: The amount actually incurred on performance of travel on
leave

to

any

place in India by the shortest route to that place is exempt. This is subject to a
maximum of the air economy fare or AC 1st Class fare (if journey is performed by
mode other than air) by such route, provided that the exemption shall be available only
in respect of two journeys performed in a block of 4 calendar years. Certain
allowances given by the employer to the employee are exempt u/s 10(14). All these

exempt allowance are detailed in Rule 2BB of Income-tax Rules and are briefly given
below:
For the purpose of Section 10(14)(i), following allowances are exempt, subject to
actual expenses incurred:
(i) Allowance granted to meet cost of travel on tour or on transfer.
(ii) Allowance granted on tour or journey in connection with transfer to meet the daily
charges incurred by the employee.
(iii) Allowance granted to meet conveyance expenses incurred in performance of duty,
provided no free conveyance is provided.
(iv) Allowance granted to meet expenses incurred on a helper engaged for
performance of official duty.
(v) Academic, research or training allowance granted in educational or research
institutions.
(vi) Allowance granted to meet expenditure on purchase/ maintenance of uniform for
performance of official duty.

OTHER ALLOWANCES
Allowances
Children Education Allowance

Exemption u/s 10(14) Rule 2BB

Rs.100 p.m.per child restricted up to
2children

Rs.300 p.m.per child restricted up to 2

Children Hostel Expenditure Allowance

children
Running Allowance ( for transport sector
employees

for meeting personal expenditure

incurred during transport from

one

place

to

Least of :
(a) 70% of the amount received, or
(b) Rs. 10,000 p.m.

another)
Transport allowance (given to meet the employees Rs.800 p.m. (in case of handicapped
expenditure for traveling from his residence to office or blind employees,
and back)

Rs. 1600 p.m.)

Allowance is a fixed monetary amount paid by the employer to the employee over and
above basic salary for meeting certain expenses, whether personal or for the
performance of his duties. As a rule, all allowances are taxable and included in gross
salary unless specific exemption is provided in respect of such allowance.
Accordingly, the allowances are of three types: categories
1. Fully taxable,
2. Partially exempt and
3. Fully exempt cash allowances.
Moreover, some allowances are unconditionally exempted but in other cases
such as HRA, exemption is subject to fulfillment of some conditions. Then In some

cases like Transport Allowance, exemption is allowed in respect of a prescribed sum

only on ad hoc basis..
Some of these allowances are dealt with in the paras to follow.
Allowances Fully Taxable :
a. Dearness Allowance , a compensatory allowance paid to meet high prices and
increased cost of living, - S 15 & 17
b. City Compensatory Allowance also a compensatory allowance paid to employees
posted in big cities like Delhi, Mumbai to compensate the high cost of living in such
cities
c. Non- practicing Allowance normally paid to compensate professionals in government
service like doctors, chartered accountants, engineers, scientists etc who are prohibited
from doing private practice,
d. Warden or Proctor Allowance paid in educational institutions for working as a
Warden of the hostel or as a Proctor in the institution,
e. Deputation Allowance paid to an employee sent from his permanent place of service to
some place or institute on deputation for a temporary period,

f. Overtime Allowance paid as extra wages paid to an employee putting in extra working
hours over and above his normal hours of duty.
g. Servant Allowance, if paid in cash even if servants may have been employed by the
employee.
h. Other Allowances by whatever name called such as family allowance, project
allowance, Marriage allowance, education allowance, and holiday allowance as these
allowances are not specifically exempt.

Wholly and unconditionally exempt Allowances

a. Allowances to Judges of the High Courts and the Supreme Court,

b .Allowances by the Unites Nations organization to its employees.
c. Foreign allowance paid by the government to its employees being Indian citizen
posted out of India for rendering services abroad
d. Pension to Gallantry award winners like Paramvir Chakra, Mahavir Chakra ,Vir
Chakra etc
Section 10(18).

Entertainment Allowances
Exemption on receipt of this allowance is allowable only to Central/ State Govt.
Employees and not to Private Sector employees. Exemption being calculated as
least of the following:

Rs.5000/-

Entertainment allowance actually received.

20% of Salary (Salary= Basic+ DA+ Commission based on fixed % of

turnover).

DEDUCTION FROM SALARY

Aggregate of taxable amount in respect of salary, various allowances and perquisites is
called the Gross Salary. From the Gross Salary so arrived, Deductions are allowed u/s
16. Other than that, no further deductions are allowed under this head. The following
are the deduction available to the

employee U/s 16:-

Entertainment Allowance: -S.16 (2)

Deduction in respect of entertainment allowance is allowed only to the Government

Servants. Employees working in private institutions are not entitled to this deduction.
Amount of deduction shall not exceed the actual amount or 20% of basic salary or
Rs.5000, whichever is less. Amount actually spent on entertainment is not relevant.

Profession Tax:
The Profession Tax, paid by an employee in a given previous year, will be deducted
from the gross salary in order to get the taxable amount of salary. Profession Tax is
levied by state government on employment.

ILLUSTRATION
Mr. Manish is the area manager of M/s. N.Steels Co. Ltd. During the financial year
2013-14, he gets the following emoluments from his employer:
Basic Salary
Up to 31-8-2013

Rs.20000 p.m

From 1-9-2013

Rs.25000 p.m

Transport Allowance

Rs.2000 p.m

Contribution to recognized provident fund 15% of Basic Salary

Children Education Allowance

Rs.500 p.m for two children

City Compensation Allowance

Rs.300 p.m

Hostel Expenses Allowance

Rs.380 p.m for two children

Tiffin Allowance(actual expenses Rs.3700)

Tax paid on Employment

Rs.5000 p.a

Rs.2500.

Compute taxable salary of Mr. Manish for the A.Y.2014-15.

SOLUTION
COMPUTATION OF INCOME FROM SALARIES OF Mr. MANISH
PREVIOUS YEAR: 13-14

PARTICULARS

ASSESSMENT YEAR: 14-15

Rs.

Basic Salary (20000 x 5) + (25000 x 7)

Transport Allowance (2000 x 12)

Rs.
275000

24000

Less: Exempt u/s 10(14) (800 x 12)

9600

Children Education Allowance (500 x 12 x 2)

12000

Less: Exempt u/s 10(14) (100 x 2 x 12)

2400

City Compensation Allowance (300 x 12)

14400

9600
3600

Hostel Expense Allowance (380 x 12x 2)

9120

Less: Exempt u/s 10(14) (300 x 2 x 12)

7200

1920

Tiffin Allowance (Fully Taxable)

5000

Tax paid on employment

2500

Employers Contribution in excess of 12% of salary

8250

(i.e. 3% of Rs.275000)
Gross Salary

320270

Less: Tax on employment u/s 16(iii)

2500

Taxable Salary

317770