HEADS OF INCOME:

Income of a person is classified into 5 categories. Thus, income belonging to a particular category is
taxed under a separate head of income pertaining to that category. Section 14 of the Act, has
classified five different heads of income for the purpose of computation of total income.All income shall
be classified under the following heads for the purpose of computation of taxable amount subject to
certain Exemptions and deductions.
THE FIVE HEADS OF INCOME ARE:
1.
2.
3.
4.
5.

Income under the head salaries (Section 15 17)

Income from house property (Section 22 27)
Profits and gains from business or profession (Section 28 44)
Capital gains (Section 45 55)
Income from other sources (Section 56 59)

INCOME FROM SALARY

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:
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
of official 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
Gratuity Sce.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
service or Part of the year in excess of 6 months.
3) Actual Amount ---------------Least of the above Xxxxx
Taxable Gratuity Xxxxx

Xxx
Xxxx

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
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)
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
salary ---------------3) Actual Amount Xxxxx
Least of the above
Taxable Amount Xxxxx

Xxxx

RETRENCHEMENT COMPENSATION Sec.10(10B)

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

What's Salary Income?

Section 15 is the charging section for the head "Salaries". It provides for charge to income tax of
certain incomes from an employer or a former employer to an assessee under the head "Salaries".
The taxability of the salary income in a previous year is as under: 1.

Any salary due in the previous year, whether paid or not;

2.

Any salary paid/allowed in the previous year, though not due or before it became due to him;

3.

Any arrears of salary paid/allowed in the previous year, if not charged to income tax for any
earlier previous year.

4.

However, if any salary paid in advance is included in the total income of any person for any
previous year, then it shall not be included again in the total income of the person when the
salary becomes due.

In short, Salary Income is chargeable to income tax on "due" basis or "receipt" basis whichever is
earlier.
Note: Any salary, bonus, commission or remuneration, by whatever name called, due to, or received
by, a partner (even if under representative capacity) of a firm, from the firm shall not be regarded as
"salary" for the purposes of this section.

Top

Employer & Employee Relationship

Section 15 brings to charge under the head "Salary", any amount due from, or amount paid or allowed
by, an employer or a former employer to an assessee employee.
Therefore, only if there is an employer and employee relationship (either in the present or in the
past), the income can be charged to income- tax under the head "Salaries".
It is necessary to distinguish the relationship of master and servant from that of an employer and
independent contractor.

The test laid down is that in the case of master and servant, the master can order or require what is
to be done and how it is to be done (control & supervision) but in case of an independent contractor
an employer can only say what is to be done but not how it shall be done.
In essence, the real test would be whether the employment is a "Contract of Service" (in which case it
is chargeable as "Salary") or "Contract for Service" (in which case it is chargeable as "Profits and
Gains of Business or Profession" or "Other Sources").
Note:
The salary received by MLA and MPs are chargeable only under the head "Other Sources", since there
is no employer-employee relationship.
The salary paid to partners by firm is taxable as "Profits and Gains of Business or Profession" as the
partners and firm are not different and they are self-employed.
However, the salary of Judges is chargeable as "Salaries".

Top

Salary Definition u/s 17(1)

The term "Salary" has been defined under Section 17(1) to include 1.

Wages;

2.

Any annuity or pension;

3.

Any gratuity;

4.

Any fees, commissions, perquisites or profits in lieu of or in addition to any 'salary or wages';

5.

Any advance of salary;

6.

Any payment received by an employee in respect of any period of leave not availed of by him
(leave salary);

7.

Recognised provident fund, to the following extent:

Contribution by employer to Recognised Provident Fund (RPF)

xxx

Less: 12% of the Salary

xxx
--xxx

Interest credited to employee in respect of RPF

xxx

Less: Interest at the prescribed rate (9.5%)

xxx
--xxx

Transferred balance of accumulated amount from URPF to RPF

xxx

Amounts exempt for each year, had the URPF been RPF

xxx
--xxx

8.

d: Contribution made, by the Central Government in the Previous Year, to the account of the
employee under a pension scheme referred to in 80CCD.
Note: For the purpose of a. above Salary = Basic Pay + Dearness Allowance, if terms of
employment provide + Commission as a Fixed Percentage on Turnover.

The term "Salary" has been defined inclusively. Hence, it is to be understood in common parlance. It is
the consideration for the service rendered by the employee to the employer or former employer.

Top

Scope of Charge of Salary Income

Salary Income earned by a Resident for services rendered in or outside India are both taxable
(whether received in India or not).
In the case of a non-resident or a not ordinarily resident, Salary received in India, whether for services
rendered in India or outside India, is taxable in India.
Besides, the following (whether received in India or not), is taxable in their hands in India, since they
are deemed to accrue or arise in India:

earned for services rendered in India,

earned for rest period or leave period which is preceded and succeeded by services rendered
in India and forming part of service contract of employment,

earned by a Citizen of India, for services rendered outside India, if paid by Government of
India.

Top

Computation of Income Under the head "Salaries"

The computation of income under the head salaries will be as under: -

Salary (including Profit in lieu of Salary)

XXX*

Allowances

XXX*

Perquisites

XXX*

Retirement Benefits

XXX*
----

Gross Taxable Salary

XXX*

Less: Deductions under section 16

XXX
----

Salary Income or Income under the head "Salaries"

XXX

Note:* Amount exempt under section 10, to be reduced from the respective items.

u/s 15
15. Salaries.- The following income shall be chargeable to income-tax under the head Salaries
(a) any salary due from an employer or a former employer to an assessee in the previous year, whether
paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former
employer though not due or before it became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a
former employer, if not charged to income-tax for any earlier previous year.

Explanation 1.For the removal of doubts, it is hereby declared that where any salary paid in advance is
included in the total income of any person for any previous year it shall not be included again in the total
income of the person when the salary becomes due.

Explanation 2.Any salary, bonus, commission or remuneration, by whatever name called, due to, or
received by, a partner of a firm from the firm shall not be regarded as salary for the purposes of this
section.

Section 17(1) in The Income- Tax Act, 1995

(1) " Salary" includes(i) wages;
(ii) any annuity or pension;
(iii) any gratuity;
(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or
wages;
(v) any advance of salary;
(va) 4 any payment received by an employee in respect of any period of leave not availed
of by him;]
(vi) the annual accretion to the balance at the credit of an employee participating in a
recognised provident fund, to the extent to which it is chargeable to tax under rule 6 of
Part A of the Fourth Schedule; and
(vii) the aggregate of all sums that are comprised in the transferred balance as referred
to in sub- rule (2) of rule 11 of Part A of the Fourth Schedule of an employee
participating in a recognised provident fund, to the extent to which it is chargeable to
tax under sub- rule (4) thereof;

Section 17(2) defines perquisites to include:

Chargeable to Tax in the hands of Specified + Non- Specified Employees
both.

The value of Rent Free Accommodation provided to the assessee by his employer
(whether Furnished or Unfurnished);

The value of any Concession w.r.t any accommodation provided to the assessee by
his employer;

Any sum paid by the Employer w.r.t any obligation liable to be discharged by the
Employee;

Any sum payable by Employer towards a Life assurance Policy or towards a

Contract of Annuity;

Chargeable to Tax in the hands of only Specified Employees.

The value of any amenity granted at Free of Cost or Concessional rate to the
assessee by his employer;

The value of Fringe Benefits or amenities (not being the ones chargeable in the
hands of the employer u/s 115WB):-

Interest free concessional rent

Use of moveable assets

Transfer of moveable assets

Medical facilities to employees

PLEASE NOTE:
The Perquisites chargeability is decided on the Nature of the Employer & consequent
levy of Fringe Benefit Tax on such Employer as per Income Tax Act. The following table
would clarify the scenario to a great extent, however this list is not of an exhaustive
nature though a thoughtful attempt is made to include all possible types of perquisites
in practical circumstances:

Sr.
No.

Nature of
Perquisite

Nature of
Employee*

FBT chargeability as Taxed as Perquisite

per nature of
in hands of
Employer
Employee
Category Category Category Category
A
B
A
B

Motor Car
1 (Owned or
Hired)

YES

NO

NO

YES

Free or
2 Concessional
Transport

YES

NO

NO

YES

Free or
Concessional
3
Lunch/
Refreshment

YES

NO

NO

YES

Free or
Concessional
4
Travelling/
Touring facility

YES

NO

NO

YES

Gift, Voucher or
Token

YES

NO

NO

YES

Credit Card
facility

YES

NO

NO

YES

7 Club facility

YES

NO

NO

YES

Rent Free
Furnished/
Unfurnished
Accommodatio
8 n or Hotel
Accommodatio
n (including
reimbursement
of hotel bills)

YES

NO

NO

YES

Discharge of
Monetary
9 obligation of
employee by
employer

NO

NO

NO

NO

YES

NO

NO

YES

10 Payment
towards Life

assurance/
annuity policy
for employee
Sweeper,
11 Gardener or
Watchman

NO$

NO$

NO$

NO$

Free Supply of
12 Gas, Electricity
or Water

NO$

NO$

NO$

NO$

13 Free Education

NO$

NO$

NO$

NO$

NO

NO

YES

YES

Use of
15 Moveable
Assets

NO

NO

YES

YES

Transfer of
16 Moveable
Assets

NO

NO

YES

YES

Medical Facility
17 upto Rs. 15000
p.a

YES

NO

NO

NO

Medical Facility
18 exceeding Rs.
15000 p.a

NO

NO

YES

YES

Allotment of
19 Securities
under ESOP

YES

N.A.

NO

N.A.

Telephone/
20 Mobile facility
to employees

YES

NO

NO

YES

Scholarship
facility to
21
employee or
his relative

YES

NO

NO

YES

Free/
Concessional
ticket for
22 private
journeys of
employees or
his relatives

YES

NO

NO

YES

NO

NO

NO

NO

NO

NO

NO

NO

14

23

Interest free
loan

Use of Laptops/
Computers

Tax paid by
employer on
Non Monetary
24
perquisites
provided to
employee.

Payment
towards
Accident/
Workman
25 compensation
insurance but
not under a
statutory
obligation

YES

NO

NO

YES

Transport
facility to
26
Employees
children

YES

NO

NO

YES

Crche facility
27 to the children
of employees

YES

NO

NO

YES

Reimbursement
of expenses
28
towards
Entertainment

YES

NO

NO

YES

Reimbursement
of expenses
incurred on
29 get- together of
employees/
directors/
others.

YES

NO

NO

YES

Reimbursement
30 towards Books
& Periodicals

YES

NO

NO

YES

Any Other
Perquisite
31
(chargeable to
FBT)

YES

NO

NO

YES

Any Other
Perquisite (not
32
chargeable to
FBT)

NO

NO

YES

YES

EXPLANATION:

The Explanation for the above treatment of various perquisites is based on

the fact that any expenditure borne by the Employer which is chargeable to
Fringe Benefit Tax (FBT), such expenditure consequently gets exempted in
the hands of the Employee, however conversely expenses which are not
chargeable to FBT either because of specific or implied exclusion by law or
such expenses being incurred by an Employer falling in the Category B as

stated below then such expenses shall be chargeable in the hands of the
Employee under Income from Salaries for Income tax purposes.

Expenditure incurred by the Employer which is fully exempted from tax e.g.
Item 23 & 24 above shall not be chargeable to tax both in the hands of
employer & employee.

II) PLEASE NOTE

1) * Nature of Employee
Category A
a) Company;
b) Firm;
c) An AOP or BOI whether incorporated or not;
d) A local authority
e) Every artificial juridical person not falling under any clauses from (1) to (4) as stated
above.
Category B
a) Sole Proprietor (Individual)
b) HUF
c) Government
d) Political Party registered under Section 29A of the Representation of the People Act
1951.
e) Persons eligible for exemption under Section 10(23C)
f) A Charitable Institution registered under Section 12AA
g) RBI
h) SEBI
i) Any other Employer not liable to Fringe Benefit Tax.
2) NO$
These perquisites are chargeable to tax in the hands of employee only if such employee
is a Specified Employee; else it is chargeable in the hands of the Employer being an
item taxable under FBT.
The Perquisites taxable in the hands of the Employees are valued in accordance with
the provisions laid under the Income Tax Rules. Under these rules perquisites provided
by the employer (directly or indirectly) to the employee or any Member of his
Household (by reason his employment) shall be taken into consideration, wherein
Member of his Household shall include:

Spouse (whether dependent or not)

Children (whether dependent or not)

 Parents (whether dependent or not)

Servants & Dependents

Central Government Act

Section 17(3) in The Income- Tax Act, 1995
(3) " profits in lieu of salary" includes(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 or the
modification of the terms and conditions relating thereto;
(ii) any payment (other than any payment referred to in clause (10), 3 , clause (10A)] 4 ,
clause (10B)], clause (11), 5 clause (12) 6 , clause (13)] or clause (13A)] of section 10), due
to or received by an assessee from an employer or a former employer or from a
provident or other fund 7 (not being an approved superannuation fund)], to the extent to
which it does not consist of contributions by the assessee or interest on such
contributions.
1. Inserted by the Finance Act, 1992, w. e. f. 1- 4- 1993.

2. Omitted by the Finance Act, 1985, w. e. f. 1- 4- 1985. it was inserted by the Taxation Laws (Amendment) Act,
1984, w. e. f. 1- 4- 1985, thus having never come into operation. The consequential amendments in sub- clauses
(iv) and (v) were also made and omitted simultaneously.
3. Inserted by the Finance (No. 2) Act, 1965, w. r. e. f. 1- 4- 1962.
4. Inserted by the Finance Act, 1975, w. e. f 1- 4- 1976.
5. Substituted for" or clause (12)" by the Direct Taxes (Amendment) Act, 1964, w. e. f. 6- 10- 1964.
6. Being inserted by the Finance Act, 1995, w. e. f. 1- 4- 1996.
7. Being omitted, ibid.

gardeners, night watchman and sweepers provided by the employer should be calculated
on an ad hoc basis as given in Letter No. 40 25 69, dated 8- 6- 1971 (reproduced below)
only when the services of sweeper are provided by the employer, i. e. the sweeper is
recruited by the employer and remunerated by him but his services are placed at the
disposal of the employee. 2 Rent- free accommodation.- While determining the fair
rental value of an accommodation owned by the company, the cost of acquisition and
other capital expenses on renovation, etc. incurred by the company should be taken into
account. In respect of premises taken on lease or rent by the company the actual
payment by the company should be taken as fair rental value of the premises. 3
Reimbursement of medical expenses.- The value of the perquisite arising by way of
payment or reimbursement by an employer of expenditure on medical treatment
incurred by his employee on himself or on his spouse, children or parents including the
provision of free medical treatment or treatment at a concessional rate will not be
included in the taxable salary of the employee in the following cases:
(i) where the medical treatment is availed at hospitals, clinics, etc. maintained by the
employer;
(ii) where the medical treatment is availed at hospitals maintained by the Government
or local authorities or hospitals approved for the purposes of CGHS or the Central
Medical Scheme;
(iii) where the expenditure is on medical insurance premia;
(iv) where the medical treatment is availed of from any doctor outside the institutions
schemes mentioned above, an expenditure of upto Rs. 10, 000 in a year in the aggregate;
and
(v) where the medical treatment is availed of in a hospital outside India and the
expenditure is incurred for treatment including on travel and stay abroad in connection
with such treatment, as also on travel and stay abroad of one attendant, to the extent
permitted by RBI subject to the condition that the amount qualifying for such tax
exemption would not include expenditure incurred on travel in the case of employees
whose gross total income as computed without considering the amount paid or
reimbursed for expenditure in connection with medical treatment exceeds Rs. 1 lakh. 4
Rent- free residential accommodation.- Keeping in view the steep escalation in rents, it
has been decided that in the case of rent- free accommodation provided by an employer
to an employee at Bombay, Calcutta, Delhi and Madras, the perquisite value will be
calculated by adding the excess over 60 per cent of the salary of the employee. The
valuation in regard to other places in India would be with reference to the excess over 50
per cent. In the case of rent- free furnished accommodation and addition in respect of
the perquisite by way of furniture at 10 per cent per annum of the original cost of such
furniture is to be made. Perquisite value of free furniture, including television sets, radio
sets, refrigerators, other household appliances and air- conditioning plant and
equipment provided to all categories of salaried taxpayers will be taken to be 15 per cent

of the original cost of such furniture or where the furniture is hired, the hire charges
payable by the employer. In the case of person,,, employed by the RBI, statutory
corporations, government companies, bodies or undertakings financed wholly or mainly
by the government and officers of government whose services have been lent to or who
are employed after retirement from Government service with any company in
which not less than 40 per cent of the shares are held by the Government of RBI or a
corporation owned by RBI, the perquisite value of unfurnished rent- free residential
accommodation will be taken to be 10 per cent of the salary due to the person in respect
of the period during which the accommodation was occupied by him. If residential
accommodation is provided by the employer at a concessional rent the value of the
perquisite will be determined as if the employee had been provided with rent- free
residential accommodation and the amount so computed will be reduced by the rent
payable by the employee. 5 Motor car conveyance.- If a motor car is provided by the
employer for the use by the employee partly for his private or personal purpose and
partly for use in the performance of his duties, a proportionate part of the expenditure
incurred by the employer on the running and maintenance of the motor car and of the
amount representing normal wear and tear of the motor car, which is attributable to the
user of the car by the employee for his private or personal purposes the duties of
employment are to be performed or from back to his residence will be regarded as use
motor car for private or personal purposes will be taken as the value of the perquisite in
the hands of the employee. Where the employee is provided with or allowed the use of
motor car for his private or personal purposes at a concessional rate, the value of the
perquisite will first be computed as if the perquisite had been provided by the employer
free of charge and the amount so computed will be reduced by the amount payable by
the employee to the employer. 6 Payments to servants.- The amount spent on the salary
of a gardener by the employer does not represent a sum paid by the employer in respect
of any obligation which but for such payment would have been payable by the employee.
The payment of salary to a gardener as such cannot be regarded as a perquisite so as to
justify that amount being taxed in the hands of' the employees. However, the expenses
incurred by way of maintenance of a gardener may be taken into account for the
purposes of estimating the value of rent- free residential accommodation provided by
the employer under rule 3. The taxable perquisite in the hands of the employee on
account of services of servants provided by the employer will be calculated at 75 per cent
of actual wages or Rs. 60 per month whichever is less in the case of sweeper and 50 per
cent of actual wages or Rs. 60 per month whichever is less in the case of gardeners and
watchman. 7 Sumptuary allowance.- Sumptuary allowance has to be treated as an
entertainment allowance. Accordingly such allowance received by a person who is in
receipt of salary from Government to the extent that such allowance is required to be
deducted in computing the income chargeable under the head' salaries' may be regarded
as an allowance exempt and may not be included in the term' salary' for the purposes of
rule 3. 8 Children' s education allowance.- Payments towards children' s education made
to the employee or on behalf of the employee will be liable to income- tax (i) where fixed
allowances are given in cash by the employer to the employee to meet the cost of
education of the latter' s children; (ii) where the education fees are paid by the employer
directly to the school; and (iii) where the employee incurs the expenses in the first
instance and gets reimbursement from the employer. 9 Premium for annuity.- The
premium paid by an ex- employer to purchase an annuity payable to an ex- employee is

taxable only under section 17 (3) (ii). The payment will not be admissible as revenue
expenditure in the hands of the employer.
1
Chapter sub- heading' B.- Interest on securities' and sections 18 to 21 omitted by the
Finance Act, 1988 w. e. f. 1- 4- 1989 .]

1. Prior to the omission, the chapter sub- heading, section 18, as amended by the Finance Act, 1965, w. e. f. 1- 41965 and the Finance Act, 1988, w. e. f. 1- 4- 1988; section 19; section 20, as amended by the Finance Act, 1979,
w. e. f. 1- 4- 1980; and section 21 read as under:" B.- Interest on securities
18. Interest on securities.- (1) The following amounts due to an assessee in the previous year shall be chargeable
to income- tax under the head" Interest on securities",- (i) interest on any security of the Central or State
Government; (ii) interest on debentures or other securities for money issued by or on behalf of a local authority
or a company or a corporation established by a Central, State or Provincial Act. (2) Nothing contained in subsection (1) shall be construed as precluding an assessee from being charged to income- tax in respect of any
interest on securities received by him in a previous year if such interest had not been charged to income- tax for
any earlier previous year.
19. Deductions from interest on securities.- Subject to the provisions of section 21, the income chargeable under
the head" Interest on securities" shall be computed after making the following deductions- (i) any reasonable
sum expended by the assessee for the purpose of realising such interest; (ii) any interest payable on moneys
borrowed for the purpose of investment in the securities by the assessee.
20. Deductions from interest on securities in the case of a banking company.- (1) In the case of a bankingcompany- (i) the sum to be regarded as a sum reasonably expended for the purpose referred to in clause (i) of
section 19 shall be an amount bearing to the aggregate of its expenses as are admissible under the provisions of
sections 30, 31, 36 and 37 (other than clauses (iii), (vi), (vii) and (viia) of sub- section (1) of section 36) the same
proportion as the gross receipts from interest on securities (inclusive of tax deducted at source) chargeable to
income- tax under section 18 bear to gross receipts of the company from all sources which are included in the
profit and loss account of the company; (ii) the amount to be regarded as interest payable on moneys borrowed
for the purpose referred to in clause (ii) of section 19 shall be an amount which bears to the amount of interest
payable on all moneys borrowed by the company the same proportion as the gross receipts from interest on
securities (inclusive of tax deducted at source) chargeable to income- tax under section 18 bear to the gross
receipts from all sources which are included in the profit and loss account of the company. (2) The expenses
deducted under clauses (i) and (ii) of sub- section (1) shall not again form part of the deductions admissible
under sections 30 to 37 for the purposes of computing the income of the company under the head" Profits and
gains of business or profession". Explanation.- For the purposes of this section," moneys borrowed" includes
moneys received by way of deposits.
21. Amounts not deductible from interest on securities.- Notwithstanding anything contained in sections 19 and
20 any interest chargeable under this Act which is payable outside India (not being interest on a loan issued for
public subscription before the 1st day of April, 1938 ) on which tax has not been paid or deducted under
Chapter XVII- B, and in respect of which there is no person in India who may be treated as an agent under
section 163 shall not be deducted in computing the income chargeable under the head" Interest on securities."

Leave Encashment Salary [Sec. 10(10AA)]

Tax Treatment of leave

encashment is as under : Cases Treatment A. During service tenure Fully taxable [Sec. 17(1)(va)] B.
At the time of retirement by employee of: Government Exempted [Sec.10(10AA)(i) ] Other Employer
Minimum of the following shall be exempted from tax u/s 10(10AA)(ii): Actual amount received;
Rs.300000; 10 months average salary Cash equivalent of 30 days average salary for every completed
year of service as reduced by actual leave availed or encashed during the tenure of service. Note: The
period of 30 days is the maximum ceiling. If employer allows leave for less than 30 days p.a. then
such lesser days shall be considered. Average salary means Basic + DA (forming part of retirement
benefit) + Commission (as a fixed percentage on turnover) being last 10 months average salary from
the date of retirement . While calculating completed year of service, ignore any fraction of the year.
While claiming the statutory amount (i.e. Rs.300000) any deduction claimed earlier as leave

encashment shall be reduced from Rs.300000 Assessee can claim Relief u/s 89(1). Leave salary paid
to the legal heir: Leave salary paid to the legal heir of deceased employee is not taxable as salary. The
Act is silent on treatment of leave encashment received after death of employee. However, on
following grounds, it can be concluded that leave salary received by a legal heir shall not be taxable in
the hands of the recipient a) A lump sum payment made gratuitously to widow or legal heir of
employee, who dies while in service, by way of compensation or otherwise is not taxable under the
head 'Salaries'. [Circular No.573, Dated 21.08.1990] b) Unutilised deposit under the capital gains
deposit account scheme shall not be taxable in the hands of legal heir. [Circular No.743 dated
6/5/1996 ] c) Legal representative is not liable for payment of tax on income that has not accrued to
the deceased till his death. d) Leave salary paid to the legal heir of deceased employee is not taxable
as salary. [Circulars Letter No. F.35/1/65-IT(B), dated 5/11/19 65 ]. Further, leave salary by a legal
heir of the Government employee who died in harness is not taxable in the hands of the recipient
[Circulars No.309, dated 3/7/1981 ]. Taxpoint: If leave salary becomes due before the death of the
assessee (no matter when and by whom received), it shall be taxable in the hands of employee.
Whereas if such salary becomes due after the death of assessee, it shall not be taxable (even in the
hands of legal heir of the assessee)
Read more at: http://www.caclubindia.com/forum/leave-encashment-salary-sec-10-10aa-239833.asp#.VFScHTSUe0A

Section 10(10A)(i) of the Income-tax Act, 1961

Commutation of pensionExtent of Exemption Clarification regarding
Circular No. 286 dated 17-10-1980, File No. 174/79/80 IT(AI) Central Board of Direct Taxes
Bulletin, Vol. XXVI No. 3 page 172.
In the case of government servants who are allowed to retire prematurely and are permitted to be
absorved in a public undertaking on or after 24-7-1971, only the lump sum amount not exceeding
the commuted value of one third of pension admissible in accordance with the provisions of
Civil Pensions (Commutation) Rules, under clause (1)(a) of Rule 37A, would be excluding from
the total income under section 10(10A) of the Income-tax Act.

The remaining two-thirds amount received by the person by way of terminal benefit under rule
37A(1)(b) would be includible in the total income subject to relief under section 89(1) of the
Income-tax Act, 1961 read with Rule 21A of the Income-tax Rules, 1962. This cannot be
regarded as payment in commutation of pension as the same is in lieu of surrender of right to two
third of pension. The mere adoption of a formula for calculation of terminal benefit, would not
convert its character into that of computed pension, since other ingredients are absent. This
position has also been clarified by the Government of India vide its O.M. No. 44(1)-EV/71,
dated 13-4-1973.
In cases where entire amount of commuted pension has been exempted under section 10(10A)(i)
of the Income-tax Act, 1961 suitable remedial action to revise the assessment preferably u/s 263
may be taken.
[I/1191-CBDT F. No. 174/29/77-IT(AI), dated the 1st July, 1978CBDT Bulletin Tech.
XXIV/170-172.]
In one of the cases the Delhi High Court has relied upon Rule 37A of the Pension Rules, 1972
which provides for payment of lump sum amount to persons absorbed in public sector
Corporation. As per this Rule payment of lump sum is made in lieu of pension. In the light of this
any payment under any similar scheme applicable to the members of the civil services of the
Union the 'entire amount of commutation was held as exempt under section 10(10A)(i). This
decision has been accepted by the Board. The instruction No. 1191 has been withdrawn.
[Circular No. 286 dated 17-10-1980, File No. 174/79/80 IT(AI) Central Board of Direct Taxes
Bulletin, Vol. XXVI No. 3 page 172.]

Central Government Act

Section 10(10) in The Income- Tax Act, 1995

(10) (i) any death- cum- retirement gratuity received under the revised Pension Rules of
the Central Government or, as the case may be, the Central Civil Services (Pension)
Rules, 1972 , or under any similar scheme applicable to the members of the civil services
of the Union or holders of posts connected with defence or of civil posts under the Union
(such members or holders being persons not governed by the said Rules) or to the
members of the all India services or to the members of the civil services of a State or
holders of civil posts under a State or to the employees of a local authority or any
payment of retiring gratuity received under the Pension Code or Regulations applicable
to the members of the defence services;

(ii) any gratuity received under the Payment of Gratuity Act, 1972 (39 of 1972 ), to the
extent it does not exceed an amount calculated in accordance with the provisions of subsections (2) and (3) of section 43 of that Act;
(iii) any other gratuity received by an employee on his retirement or on his becoming
incapacitated prior to such retirement or on termination of his employment, or any
gratuity received by his widow, children or dependents on his death, to the extent it does
not, in either case, exceed one- half month' s salary for each year of completed
service, 5 calculated on the basis of the average salary for the ten months immediately
preceding the month in which any such event occurs, subject to such limit as the Central
Government may, by notification in the Official Gazette, specify in this behalf having
regard to the limit applicable in this behalf to the employees of that Government]:
Provided that where any gratuities referred to in this clause are received by an employee
from more than one employer in the same previous year, the aggregate amount exempt
from income- tax under this clause 6 shall not exceed the limit so specified]:

1. Inserted by the Finance (No. 2) Act, 1991, w. e. f 1- 4- 1991

2. Substituted by the Finance Act, 1974, w. e. f. 1- 4- 1975. Earlier, it was amended by the Finance Act, 1972, w.
e. f. 1- 4- 1973 and the Finance Act, 1974 itself w. r. e. f. 1- 6- 1972 1- 4- 1962.
5. Substituted for' calculated on the basis of the average salary for the three years immediately preceding the
year in which the gratuity is paid, subject to a maximum of thirty- six thousand rupees or twenty months' salary
so calculated, whichever is less' by the Direct Tax Laws (Amendment) Act, 1987, w. e. f. 1- 4- 1989. The italicised
words were substituted for' thirty thousand' by the Finance Act, 1983, w. r. e. f. 1- 4- 1982.
6. Substituted for' shall not exceed thirty- six thousand rupees" by the Direct Tax Laws (Amendment) Act, 1987,
w. e. f. 1- 4- 1989. The italicised words were substituted for" thirty thousand' by the Finance Act, 1983, w. r. e. f.
1- 4- 1982.

Provided further that where any such gratuity or gratuities was or were received in any
one or more earlier previous years also and the whole or any part of the amount of such
gratuity or gratuities was not included in the total income of the assessee of such
previous year or years, the amount exempt from income- tax under this clause 1 shall not
exceed the limit so specified] as reduced by the amount or, as the case may be, the
aggregate amount not included in the total income of any such previous year or years: 2 ]
Explanation.- 3 In this clause and in clause (IOAA)]," salary" shall have the meaning
assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule;]
1. Substituted for' shall not exceed thirty- six thousand rupees' by the Direct Tax Laws (Amendment) Act, 1987,
w. e. f. 1- 4- 1989. The italicised words were substituted for' thirty thousand" by the Finance Act, 1983, w. r. e. f.
1- 4- 1982.
2. Omitted by the Direct Tax Laws (Amendment) Act, 1987, w. e. f. 1- 4- 1989. Prior to the omission, the third
and fourth provisos, as amended by the Finance Act, 1983, w. r. e. f. read as under:" Provided also that the
Central Government may, having regard to the maximum amount which may for the time being be exempt
under sub- clause (i) increase, by notification in the Official Gazette, the limit of thirty- six thousand rupees, for
all the three purposes for which it has been mentioned in the foregoing provisions of this clause, up to such
maximum amount: Provided also that in relation to cases in which the event (that is to say retirement of the
employee or his becoming incapacitated or termination of his employment or his death, as the case may be) on
which gratuity is received had taken place before the 31st day of January, 1982, the proviso immediately
preceding this proviso shall not apply and the remaining provisions of this clause shall have effect as if for the
words" thirty six thousand rupees", at the three places where they occur, the words" thirty thousand rupees"
had been substituted."
3. Substituted for" In this clause' by the Direct Tax Laws (Amendment) Act, 1987, w. e. f. 1- 4- 1989.

3 All the three limits specified in the section will operate as cumulative conditions and
the exempt portion of the gratuity will be restricted to any of these three limits
whichever is the least. Retirement gratuity will be exempt to the extent mentioned in the
latter half of the section and the remaining amount will be entitled to relief under

section 89 1. In the case of gratuity funds approved for the purposes of Income- tax Act a
provision authorising the payment of gratuity to an employee while he continues to
remain in service should not be allowed. The latter half of the section should be
regarded as covering the case of only a gratuity payment on the employee' s retirement
or on his becoming incapacitated or on termination of his employment or on his death.
The rules of a fund approved for the purposes of Income tax Act should not permit the
payment of gratuity in the form of annuities payable over a specified number of years. In
order to claim the exemption under the section it is necessary that the amount of
gratuity should be calculated exactly on the basis laid down in the section.[ Letter No. 1
(1 79) 162, dated 13th December, 1962 ] 4 The expression' termination of employment
used in the section as amended by Finance Act, 1972 covers the case of an employee
whose services come to an end due to his resignation. 5 Limit of exemption of deathcum- retirement gratuity under section 10 (10) (iii) has been raised to Rs. 1 lakh in
relation to employees who retire of become incapacitated or die on or after 1st April,
1988 or whose employment is terminated on or after that date.

(HRA)

is received by the salaried class. A deduction is permissible under Section 10(13A) of the

Income Tax Act, in accordance with Rule 2A of the Income Tax Rules. You can claim exemption on your
HRA under the Income Tax Act if you stay in a rented house and get a HRA from your employer.
The HRA deduction is based on salary, HRA received, the actual rent paid and place of residence. The
place of residence is important. For Mumbai, Kolkata, Delhi or Chennai, the tax exemption on HRA is 50
percent of the basic salary, while for other cities it is 40 percent of the basic salary.
The city of residence is to be considered for calculating HRA deduction.
The least value of these is allowed as tax exemption on HRA:
Actual rent allowance the employer provides as part of salary in the relevant period during which the
rental accommodation was occupied Actual rent paid for the house, less 10 per cent of basic pay 50

percent of basic salary if you reside in Mumbai, Calcutta, Delhi or Chennai, or 40 per cent if you reside in
other cities.
In order to claim the exemption, the rent must actually be paid for the rented premises which you occupy.
Also, the rented premises must not be owned by you. As long as the rented house is not owned by you,
the exemption of HRA will be available up to the limits specified.
For the purpose of this deduction, salary means basic salary and includes dearness allowance, if the
terms of employment provide it, and commission based on a fixed percentage of turnover achieved by the
employee.
The deduction is available only for the period during which the rented house is occupied by the employee
and not for any period after that. It is to be noted that the tax benefits for home loans and HRA are two
separate aspects.
In case you are paying rent for an accommodation, you can claim tax benefits on the HRA component of
your salary, while also availing tax benefits on a home loan.
You need to submit proof of rent paid through rent receipts, duly signed and stamped, along with other
details such as the rented residence address, name of the owner, period of rent etc.
How it applies :-For example, assume one earns a basic salary of Rs 20,000 per month and rents a flat
in Mumbai for Rs 5,000 per month. His actual HRA is Rs 8,000. He is eligible for 50 percent of the basic
pay for HRA exemption.
Least of:
Actual HRA received Rs 8,000
50 percent of basic salary Rs 10,000
Excess of rent paid over 10 percent of salary, i.e., Rs 5,000 less Rs 2,000 Rs 3,000.
As such, Rs 3,000 per month is the least and will be the exemption allowable for HRA deduction.
- See more at: http://taxguru.in/income-tax/deduction-under-section-1013a-for-house-rentallowance.html#sthash.ulqJfmQ8.dpuf

Voluntary Retirement Assessee can claim both exemption u/s 10(10C) & rebate u/s 89 The
assessee is entitled to the exemption under section 10(10C) of the Act and also rebate under section 89
of the Act in respect of the amount received in excess of Rs.5,00,000 on account of voluntary retirement.
Thus their Lordships have held that the assessee, who opts for voluntary retirement, is not only entitled to
exemption under section 10(10C) but also rebate under section 89 of the Income Tax Act. Similar view is
taken by the Honble Karnataka High Court in the case of CIT v. P. Surendra Prabhu (supra) wherein their
Lordships held as under : That the assessee, employee of the respondent bank was not only entitled to
the benefit of exemption under section 10(10C) of the Act to the extent prescribed in the provision itself
but for any amount over and above the prescribed limit; under the aforesaid provision, the assessee was
also entitled to relief under section 89(1) of the Act read with rule 21A. INCOME TAX APPELLATE
TRIBUNAL, CHANDIGARH ITA No. 507/Chd/2012 Assessment Year: 2007-08 Shri Manmohan Singh
Bedi v. A.C.I.T. Date of Pronouncement: 26.07.2012 ORDER PER T.R. SOOD, A.M In this appeal the

assessee has raised the following ground: That on facts and circumstances of the case, the ld. CIT(A)
was not justified in upholding the disallowance of exemption u/s 10(10C) of the Income-tax Act. 2. The
appeal has been filed late by 541 days. The assessee has filed an application for condonation of delay
which is duly supported by the affidavit. The ld. counsel of the assessee referred to the application and
pointed out that originally the assessee has filed return declaring income of Rs. 13,10,521/- on which
total tax due including interest was Rs. 80,950/-. Later on this return was revised declaring total income
of Rs. 8,10,521/- after claming deduction u/s 10(10C) amounting to Rs. 5.00 lakhs and total tax remained
only at Rs. 50,369/-. However, the Assessing Officer did not allow the deduction u/s 10(10C) of the Act.
Accordingly rectification application was moved for allowing deduction u/s 10(10C). The rectification
application was rejected vide Rectification order dated 16.2.2010 on which tax due was determined at
Rs. 80,954/-. The assessee was advised not to file the appeal because total benefit which the assessee
could have received was less than Rs. 30,000/- and the assessee was advised that after paying fee to
the Tribunal and Advocate Fee 2 nothing would be gained. Accordingly no appeal was filed. However,
later on the Assessing Officer passed another rectification order u/s 154 on 6.3.2012 in which net tax
payable was shown at Rs. 3,43,607/-. When such a huge demand was raised then the assessee was left
with no option but to file appeal before the Tribunal. Therefore, the appeal was filed late because of the
sufficient cause and the same may be condoned particularly in view of the fact that the issue raised in
appeal is covered in favour of the assessee. 3. On the other hand, the ld. DR for the revenue submitted
that once the assessee had accepted the decision by not filing any appeal then later on the same could
not be made as reason for explaining the delay. 4. We have heard the rival submissions carefully and we
are satisfied that the assessee had a sufficient cause for not filing the appeal in time. The assessee
being an employee might have initially accepted the decision of the Department because additional tax
payable was only Rs. 30,000/- to avoid litigation expenses. However, the demand has been increased to
Rs. 3,43,607/- vide Rectification order dated 6.3.2012 then the assessee was forced to file the appeal.
We are of the opinion that this is reasonable and sufficient cause for filing the appeal late and accordingly
we condone the delay. 5. As far as the merits of the case are concerned, we find that the issue is
squarely covered in favour of the assessee by the order of the Tribunal in case of Shri Bikran Jit Passi V
DCIT dated 9.11.2011, ITA NO. 925/Chd/2011 A.Y 2008-09. In this case the Tribunal has held as under:The present appeal filed by the assessee is directed against the order, dated 14.07.2011 of the ld.
CIT(A) Panchkula passed u/s 250(6) of the Income-tax Act,1961 (in short hereinafter referred to as the
Act) 2. The assessee has raised the following grounds of appeal : 1. That the ld. CIT(A) has erred in law
in upholding the withdrawal of exemption of Rs.5,00,000/- claimed under Section 10(10C) of the Act which
is arbitrary and unjustified. 2. That the ld. CIT(A) has further erred in law as well as on facts in holding that
the Exit Option Scheme does not satisfy the conditions laid under Section 10(10C) read with rule 2BA
which is incorrect and as such the exemption withdrawn and upheld is wholly unwarranted. 3. That the
order of the ld. CIT(A) is erroneous, arbitrary, opposed to law and facts of the case and is, thus
untenable. 3. The facts of the case in brief are that the assessee Bikram Jit Passi filed return of income,
on 11.08.2008 for the assessment year 2008-09. During the course of assessment proceedings, the AO
noted that the assessee had claimed exemption u/s 10(10C) of the Act amounting to Rs.5,00,000/-. The
AO disallowed the claim of the assessees as not being eligible for exemption u/s 10(10C) of the Act. 4.
The CIT(A) upheld the order of the AO. The relevant findings of the CIT(A) are as under : Keeping in
view the clear conditions in the scheme regarding filling up of vacancies caused by the release of officers
and the confirmation by the Bank at point No.10 above that the scheme does not comply with Section
10(10C) of the IT Act and is not approved by Income Tax Department conditions No. (iii) & (iv) of Rule
2BA are violated. Therefore, the scheme is not eligible for exemption under Section 10(10C) of the IT
Act,1961. As a result, the assessees are not held eligible for exemption u/s 10(10C) of the Act. 5. We
have heard both the parties and carefully perused and considered the facts of the appeal. The ld. AR
placed reliance, on the decision, in the case of Pandya Vinod Chandra Bhogilae V ITO (2010) 045 DTR
105 ITAT, Ahmedabad, to state that the fact- situation of the present appeal is squarely covered by the

decision. Having considered the decision, we found that the same is applicable to the facts of the present
cases. The relevant and operative part of the decision is reproduced hereunder : 2. Thus the only issue
involved in this appeal is about allowability of exemption under section 10(10C) of the Income Tax Act,
1961. 3. The facts of the case are that assessee is a Deputy Manager in SBI and has taken VRS on 31-52006 under exit option scheme introduced by the bank of India with effect from 7-5-2005. The assessee
received salary and pension amounting to Rs.3,81,894 (including exgratia). On examination of Form
No.16 the Assessing Officer noticed that assessee received exgratia of Rs.3,07,236 on VRS. He claimed
exemption under section 10(10C) of the Act. The Assessing Officer disallowed the claim by following
circular No. Chief CIT, Baroda letter BRD/Chief CIT/Tech/MICS/10(10C)/2009-10, dated 17-6-2006. The
assessee relied on the decision of Tribunal, Kolkata in the case of Dy.CIT v. Krishna Gopal Saha (2009)
29 DTR (Kol)(TM)(Trib) 385 but the learned Assessing Officer did not agree and made the addition. The
learned Commissioner (Appeals) also confirmed the disallowance by trying to distinguish the decision of
Third Member in Dy.CIT v. Krishna Gopal Sahas case (supra). 4. We have heard the parties and perused
the material on record. In our considered view the distinction cited by the learned Commissioner
(Appeals) is not sound and does not stand to reason. The only basis for not allowing the claim has been
that scheme for VRS is not in accordance with rule 2BA. However,, it has not been pointed out how the
employer has not framed the scheme in accordance with rule 2BA. Earlier till 2002 schemes were
required to be approved by the Chief Commissioner but thereafter such requirement has been dispensed
with and, therefore, it is only for the employer to frame the scheme for VRS or for earlier exit option. If
Assessing Officer had any doubt about the scheme he could have enquired from the employer. So far as
the assessee employee is concerned, he cannot be penalized and tax will be levied on him on the
assumption that the scheme framed by employer is not in accordance with rule 2BA. In any case, the
judgment of Third Member in Dy.CIT v. Krishna Gopal Saha (supra) is clearly applicable and we do not
find any reason to take a different view. For the sake of convenience we refer to following para from the
Third Member judgment in Dy.CIT v. Krishna Gopal Sahas case (supra) as under: 5. At the time of hearing
before me, none appeared on behalf of the assessee-respondent. I have, therefore, heard the learned
department Representative and perused the material placed before me. I find that the issue has been
considered by the Honble jurisdictional High Court in the case of SAIL DSP VR Employees Association
1998 v. Union of India (supra) in which their Lordships held as under : Section 10(10C) of the Income Tax
Act, 1961, uses the expression any amount received by an employee. At the time of his voluntary
retirement in accordance with any scheme or schemes of voluntary retirement. if a plain literal
interpretation of statutory provision produced a manifestly absurd and unjust result, which the legislature
could not have intended, the court is supposed to modify the language used by the legislature even to do
some violence to it so as to achieve the obvious intention of the legislature and produce a rational
construction. An expression used in the statute is not always to be interpreted literally or grammatically.
Sometimes it has to be interpreted having regard to the context in which the expression is used and
having regard to the object and purpose for which the same is enacted. Sec.10(10C) was inserted in
order to make voluntary retirement attractive so as to reduce human complements for securing economic
viability of certain companies. This object was elaborated by various departmental circulars and
explanatory statements issued from time to time. Similarly, rule 2BA of the Income Tax Rules, 1962, which
was inserted by IT (Sixteenth Amendment) Rules, 1962, was amended from time to time. All these go to
show that this was intended to make voluntary retirement more attractive and beneficial to the employee
opting for voluntary retirement. Therefore, this has to be interpreted in a manner beneficial to the optee for
voluntary retirement, if there is any ambiguity. Sums paid on voluntary retirement to the extent of rupees
five lakhs are exempted from being charged to tax by reason of section 10(10C). Even if the payment is
stretched over a period of years, the same would not become chargeable to tax in any subsequent
assessment year. From the above it is evident that their Lordships of the jurisdictional High Court held
that an employee, who takes voluntary retirement, is entitled to deduction under section 10(10C) even if
the payment is stretched over a period of years. They have also held that provision of section 10(10C)

should be interpreted in a manner beneficial to the optee for voluntary retirement. It may be pointed out
that in the above-mentioned case, the employer i.e. SAIL was of the opinion that the employees were not
entitled to exemption under section 10(10C) and accordingly, SAIL had been deducting tax at source on
the amount paid under their voluntary retirement scheme. The facts are similar in the assesses case,
because in the case of the assessee also, the employer believing that the assessee is not entitled to
deduction under section 10(10C) has deducted tax at source on the amount paid on voluntary retirement.
The facts being identical, the above decision of Honble jurisdictional High Court would be squarely
applicable to the case under appeal before the Tribunal. 6. Similarly, Honble Bombay High Court in the
case of CIT v. Nagesh Devidas Kulkarni (supra) held as under : The assessee is entitled to the exemption
under section 10(10C) of the Act and also rebate under section 89 of the Act in respect of the amount
received in excess of Rs.5,00,000 on account of voluntary retirement. Thus their Lordships have held that
the assessee, who opts for voluntary retirement, is not only entitled to exemption under section 10(10C)
but also rebate under section 89 of the Income Tax Act. Similar view is taken by the Honble Karnataka
High Court in the case of CIT v. P. Surendra Prabhu (supra) wherein their Lordships held as under : That
the assessee, employee of the respondent bank was not only entitled to the benefit of exemption under
section 10(10C) of the Act to the extent prescribed in the provision itself but for any amount over and
above the prescribed limit; under the aforesaid provision, the assessee was also entitled to relief under
section 89(1) of the Act read with rule 21A. 6. From the above it is evident that while the learned AM relied
upon the decision of Honble Madras High Court in the case of CIT v. M.Chelladurai & Ors. (2009) 317
ITR 370(Mad) : (2009) 176 Taxman 31, he has not taken into account the decisions of other High Courts
including the jurisdictional High Court. The Honble jurisdictional High Court under the identical facts held
the assessee, i.e., the retired employee, to be entitled to deduction under section 10(10C). Similar view is
taken by Honble Bombay as well as Karnataka High Courts. The decision of Honble jurisdictional High
Court is binding upon us and moreover if two views are possible, while interpreting the provision, a view
which is favourable to the assessee has to be adopted. Honble jurisdictional High Court in the abovereferred case of SAIL DSP VR Employees Association 1998 v. Union of India (supra) has also held that
the provisions of section 10(10C) are to be interpreted liberally in a manner which is beneficial to retired
employees in view of the above. I respectfully following the decisions of Honble jurisdictional High Court,
Bombay High Court and Karnataka High Court agree with the learned JM and hold that the assessee is
entitled to exemption under section 10(10C) to the extent of Rs.5 lakhs. Respectfully following the above
decision of the Tribunal, we allow the claim of assessee. 6. The issue in question is covered by the
decision of the Honble Tribunal, as reproduced above. The assessee/appellant was also employed in the
State Bank of India. Respectfully following the said decision, the appeal is decided in favour of the
assessee. 6. Following the above decision we decide the issue in favour of the assessee. 7. In the
result, appeal filed by the assessee is allowed. - See more at: http://taxguru.in/income-tax-caselaws/assessee-opts-voluntary-retirement-claim-exemption-1010c-rebate-89.html#sthash.83l9QvT3.dpuf

Tax on perquisite
In recent times a large number of foreign companies have been
deputing their employees to India for employment. These individuals
are liable to pay Income tax on their earnings in India. At the same
time, they could also be liable to pay tax in their home country,
depending on their home country tax laws. To mitigate their hardship
taxes are paid by the employers on behalf of their employees. Such
payments are in the nature of perquisite in the hands of employees,

which is reasonably settled matter. However, the litigation exists for a

long in respect of treatment of this payment as a monetary or nonmonetary perquisite. Recently, Income Tax Appellate Tribunal, Delhi
ruled that the income tax that an employer pays on behalf of its
employee is a non-monetary benefit and exempt from tax under
section 10(10CC) of the Income Tax Act. In the discussion to follow,
the relevant provisions of the Act are analyzed in the light of
aforementioned ruling of the tribunal.
Perquisites under the Act
Section 2(24) of the Income Tax Act, 1961 deals with the perquisites
under the definition of 'Income'. Perquisite is an advantage received by
the holder of an office over and above the salary. Any benefit received
incidental to employment in excess of salary is a Perquisite. Perquisite
postulates relationship of employer and employee.[Shalilendra Kumar
v.Union of India (1989) 175 ITR 494 (All.).
Tax on 'tax perquisite' paid by the employer
If an employer paid the tax on behalf of an employee, which is
otherwise payable by the employee is considered as taxable perquisite.
However, under section 10(10CC) of the Income Tax Act, 1961, an
employer has been given an option to pay tax on the whole or part of
the value of perquisite on behalf of employee without deduction of it
from the salary of an employee. When the tax actually paid by an
employer as non-monetary perquisite, it is not taxable in the hands of
employees. Such tax payment is not allowable as business expenditure
in the tax assessment of an employer. But the exemption is available
only on non-monetary perquisite paid by the employer. In the case
of RBF Rig Corporation LLC (RBFRC) v. CIT( 2007 ) 165 Taxman
101(Delhi), Delhi Tribunal held that if tax on salary is paid by the
employer on behalf of employee, it is a perquisite provided for by way of
non-monetary payment and therefore, exemption under the provisions
of Sec. 10(10CC) will be applicable.

It is almost a settled matter that tax payment by the employer on

behalf of employees is in the nature of perquisite in the hands of the
employee. But whether this is a monetary or non-monetary perquisite,
has been a matter of litigation for long time. The issue assumed
significance after insertion of section 10(10CC) in the Income Tax Act,
1961. Accordingly, tax paid by the employer on behalf of the employee
on non-monetary perquisite which is exempt from tax in the hands of
employees. In this regard, it is pertinent to note that under section
200 of the Companies Act, 1956 registered companies are prohibited
from making payment of remuneration free of any tax to its employees
and officers.
Recent case before Delhi Tribunal
In a recent case, Triton Holdings Limited v. Deputy Director of Income
Tax, Deharadun (ITA No.2541-Delhi-2009) , ITAT, Delhi held that tax
paid by the employer on behalf of their employees must be treated as
non-monetary perquisite for claiming exemption under section
10(10CC) of the Income Tax Act, 1961. Further tribunal held that this
payment is subject to one stage grossing up only while computing the
salary of employees.
In this case, employees of a company known as 'Triton Holdings
Limited' claimed the income tax paid on their behalf by their employer
as a non-monetary perquisite and further claimed it as an exemption
under section 10(10CC) of the Income Tax Act, 1961. However,
the Assessing Officer did not accept this view and contended that tax
perquisite is subject to multiple grossing up and clubbing with the
taxable income of the employees and no exemption could be allowable
under section 10(10CC) of the Income Tax Act.
Issues for decision
The tribunal had to consider a issue of whether tax perquisite
provided to the employees should be subject to multiple grossing up or
should it be considered as a non-monetary perquisite for the purpose

of claiming exemption u/s 10(10CC) of the Income Tax Act or not in

the backdrop of earlier decision of its special bench in RBF Rig
Corporation LLC (RBRC) v. CIT( 2007 ) 165 Taxman 101(Delhi).
The Tribunals Decision
In this case after hearing both sides, Delhi Income Tax Appellate Tribunal held
that the tax perquisite constituted as a non-monetary perquisite in the hands
of the employees, by placing reliance on the earlier decision of Special Bench.
Accordingly, an exemption under section 10(10CC) was available in respect of
the tax payment and the appeal was disposed off without ordering for refund of
appeal fee. If the Commissioner of Income Tax (Appeals) had followed the order
of the special bench in RBF Rig Corporation case, the unwarranted appeal
would not have arisen. At the same time, as the Commissioner of Income Tax
(Appeals) had not any intention to harass the appellant or cause
any monetary loss to the assessee, no costs had been awarded by the tribunal.

Conclusion
This ruling reiterates the principle pronounced in the case of RBF Rig
Corporation that the tax paid by the employer in respect of salary paid
to the employees would constitute non-monetary perquisite in the
hands of the employees, eligible for exemption under section 10(10CC)
of the Income Tax Act,1961 and the payment must be subject to single
stage grossing up while computing the taxable salary income of the
employees. However, a challenge to the ruling by the department in a
High Court cannot be ruled out.