Chapter No: 1 Introduction- Salary

1.1 Introduction:
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Salary, as commonly understood, 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.
Salary is determined by market pay rates for people doing similar work in similar industries
in the same region. Salary is also determined by the pay rates and salary ranges established
by an individual employer. Salary is also affected by the number of people available to
perform the specific job in the employer's employment locale.
Salary is computed, one must have answers to the following questions

Who are the persons liable to pay tax on salaries?

When the Salary taxable- on accrual or on receipt?
What is the place of accrual for salary income?
How is salary computed? Which items are included, which items are exempt and what
are the deductions available?

1.2 Who is Taxable?

Salary is the remuneration paid by an employer to his employee for the services
rendered & an individual can only earn salary as an individual can only render
services. Any individual who receives remuneration is liable to pay tax on his income
from salary. The individual must be working in any company, can be full time or part
time.
The remuneration received by the director is also taxable under the head Salary.
Any salary, bonus, commission or remuneration due to or received by a partner is not
considered as salary & such amount is taxable under the head profit from business.
The salaries & allowances received by a Member o Parliament or MLA are taxable
under income from other sources.
1.3 Basis of Charge (Section 15)
Under section 15 following income is chargeable to tax under the head Salary:
Any salary due from an employer or a 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 of an employer
or former employer though not due.
Any arrears of salary paid or allowed to him in the previous year by or on behalf of
employer or former employer if not charged to tax earlier.
Any salary, bonus, commission or remuneration due to or received by Partner of the
firm from the firm shall not be regarded as Salary for the purpose of this section.
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1.4 What does salary include?

Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of
Salaries including therein

Wages
Annuity or pension
Gratuity
Fees & Commission,
Perquisites
Profits in lieu of salary
Advance
Amount transferred from unrecognized provident fund to recognized provident fund
Contribution made by the Central Government or any other employee in the account

of an employee under a pension scheme

Payment received by an employee in respect of any period of leaves not availed by
him i.e. Leave encashment
Annual accretion to the balance at the credit of an employee participating in a
recognized PF to the extent it is taxable.

Chapter No: 2 Heads of Salary

2.1 Perquisites- Section 17 (2)

Perquisite is additional benefit received by an employee over & above his basic salary but it
is different from allowance. Perquisite may be paid voluntarily or by virtue of service
contract.
Perquisites taxable in case of all employees.
Perquisites taxable only in case of specified employees like directors etc.
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 Perquisites not taxable at all

Perquisites Taxable in case of All Employees:
Under Section 17 (2) Perquisites includes:The following perquisites are taxable in case of every employee, whether specified or
not:
1. Rent free house provided by employer
2. House provided at concessional rate
3. Any obligation of employee discharged by employer e.g. payment of club or hotel
bills of employee, salary to domestic servants engaged by employee, payment of
school fees of employees children etc.
4. Any sum paid by employer in respect of insurance premia on the life of employee
5. Notified fringe benefits (on which fringe benefit tax is not applicable) it includes
interest free or concessional loans to employees, use of movable assets, transfer of
moveable assets.
Perquisites taxable only for specified employees:
1. Services of a sweeper, a gardener, a watchman or a personal attendant provided by an
employer to an employee without charge or with nominal charge if domestic servant
is engaged by employer and salary is paid by employer.
2. Supply of gas, electric energy or water for household consumption of employee
without any charge or with nominal charge if connection is in the name of employer
and bills are paid by employer
3. Education facility to any household members of the employee without any charge or
with nominal charge if bills are issued in the name of & paid by employer.
4. Any medical facility in India provided to an employee or any member of his family if
bills are in the name of employer and paid or reimbursed by employer in excess of `
15,000 per assessment year.
5. Car or any other automotive conveyance.
6. Transport facility by a transport undertaking (not being provided by railways or by an
airline).

1.
a)
b)
c)

Perquisites not taxable in all cases:

Rentfree furnished or unfurnished accommodation in cases mentioned below:
Rent freeaccommodation given in a remote area.
A temporary accommodation of 800 sq. ft given at mining site, etc.
Hotel accommodation given after transfer for not exceeding 15 days

d) Rentfree official accommodation provided to a Judge of High Court or Supreme

Court or an official of Parliament or a Union Minister and a Leader of opposition in
2.
3.
4.
a)

Parliament.
Leave travel concession to employees subject to provision of section 10(5)
Providing use of computer & laptop to an employee or any member of his household.
Providing medical facilities to an employee or any member of his family:
in a hospital maintained by the Government or any local authority or approved by the

Government for the medical treatment of Government employees.

b) in a hospital maintained by the employer.
c) in respect of prescribed diseases or ailments, in any hospital approved by the Chief
Commissioner having regard to the prescribed guidelines.
5. Health insurance premium of the employee or any member of his household paid by
the employer
6. Any other medical facility in India provided to an employee or any member of his
family
7. Bills are in the name of employer and paid or reimbursed by employer up to ` 15,000
per assessment year
8. Bills are in the name of employee and paid or reimbursed by employer up to ` 15,000
per assessment year
9. Medical facility outside India if a few conditions are satisfied
10. Any perquisite other than taxable perquisites already mentioned (few examples are
car, holiday home, club, free tea / refreshment / lunch, gift, etc.)

2.2 Valuation of Perquisites:

The rules relating to valuation of such benefits & amenities have been mentioned in rule 3.
They are as under.
Accommodation:
For the purpose of valuation of house, employees are divided into 2 categories:
a) Central and State Government employees: If accommodation is provided by the State
or Central Government to their employees, the value of such accommodation is
simply the amount fixed by the government (called the license fees) in this regard.
b) Other Employees: The valuation of accommodation for this category of non
government employees depends upon whether the accommodation given to the
employee is owned by the employer or taken on lease.
Accommodation owned by employer
The value of accommodation is:

i.

20% of salary in cities having population exceeding four lakhs as per

ii.

1991 census.
15% of salary in other cities in respect of the period for which the
accommodation was occupied by the employee during the previous

year.
Accommodation is taken on lease / rent by the employer:
i. The value of such accommodation is actual amount of lease rental paid
or payable by the employer or 20% of salary, whichever is lower.
Salary: For the purpose of valuation of perquisites in respect of rent free accommodation,
salary includes

Basic Salary
DA
Bonus
Commission
Fees
All other taxable allowances
Any monetary payment

Hotel Accommodation:
If accommodation is provided in Hotel the value of the benefit in such a case shall be 24% of
the annual salary or the actual charges paid or payable to such hotel, whichever is lower.
Personal Attendants:
The value of benefit of provision of services of sweeper, watchman, gardener or personal
attendant to the employee or any member of his household shall be the actual cost to the
employer. If the above servants are engaged by the employer and facility of such servants are
provided to the employees, it will be a perquisite for specified employees only. On the other
hand, if these servants are employed by the employee and wages of such servants are paid /
reimbursed by the employer, it will be taxable perquisite for all classes of employees.
Gas, Electricity & Water:
The value of these benefits is taxable in the hands of specified employees, if the connection is
taken in the name of the employer, and is determined according to the following rules:
If the employer provides the supply of gas, electricity, and water from its own
sources, the manufacturing cost per unit incurred by the employer shall be the value
of perquisite.
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 If the supply is from any other outside agency, the value of perquisite shall be the
amount paid by the employer to the agency supplying these facilities.
Where the employee is paying any amount in respect of such services, the amount so
paid shall be deducted from the value of perquisite calculated under (a) or (b).
Where the connection for gas, electricity, water supply is in the name of employee and
the bills are paid or reimbursed by the employer, it is an obligation of the employee
discharged by the employer. Such payment is taxable in case of all employees under
Section 17 (2) (IV).
Free or Concessional Education:
a) Cost of free education to any member of employees family provided in an
educational institution owned and maintained by the employer shall be determined
with reference to reasonable cost of such education in a similar institution in a near by
locality. For education facilities provided to the children of employee, the value shall
be nil, if the cost of such education per child does not exceed Rs.1, 000 per month.
b) Where free education facilities are allowed to any member of employees family in
any other educational institution by reason of his being in employment of that
employer, the value of perquisite shall be determined as in (a).
c) In any other case: The value of benefit of providing free or concessional educational
facilities for any member of the house hold (including children) of the employee shall
be the amount of expenditure incurred by the employer.
d) While calculating the amount of perquisite in all in above cases, any amount paid or
recovered from the employee in this connection, shall be deducted.
Interest Free or Concessional Loans:
The employees working or any family member in financial institutions get this facility. The
value of perquisites arising from such loans would be the excess of interest payable at
prescribed interest rate over interest.
Use of Assets:
It is common practice for an asset owned by the employer to be used by the employee. This
perquisite is to be charged at the rate of 10% of the original cost of the asset as reduced by
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any charges recovered from the employee fro such use. However, the use of computers &
laptops would not give rise any perquisites.

Section 17 (3) Profits in Lieu of Salary

It is not a regular payment received from the employer. It is received instead of salary.
It includes:
1. 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 there to;
2. Any payment other than any payment referred to in clause (10) (clause (10 A))
(Clause (10B), Clause (11) Clause (12) Clause (13) or clause (13A) of section 10, due
to or received by an assessee from an employer or a former employer or from
provident fund or other fund, to the extent to which it does not consist of contributions
by the assessee or interest on such contributions;
3. Any sum received under a Keyman insurance policy including the sum allocated by
way of bonus on such policy.
4. Any amount due to or received, whether in lump sum or otherwise, by an assessee
from any person
a) Before his joining any employment with that person, or
b) After termination of his employment with that person.

Provident Fund:
PF scheme provides for monthly contributions from the employees as well as the employer to
a PF account. The balance to the credit of such accounts also earns interest. The entire
balance is paid to an employee on his retirement. The taxability of
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o Employers contribution,
o Interest credited annually
o Balance paid on retirement depends upon the type of Provident Fund.
There are different types of PF

Statutory PF [ setup & administered by government]

Recognized PF [ set up & operated by private sector employer, & recognized by
Income Tax Department.
Unrecognized PF [ set & operated by employer, not recognized by Income Tax dept.]

Allowances:
It is fixed amount regularly paid to an employee in addition to his basic salary for various
purposes. Thus Expense Allowances are granted to meet expenses for the performance of
duties or to meet the employees personal expenses at office. Dearness Allowance, City
Compensatory Allowance or House Rent are granted to compensate him for the increased
cost of living. All Allowances are taxable as salaries, unless specifically exempted.
Exempt u/s 10: Following allowances are exempt to the extent provided under section 10.
Allowances for expenses on travelling on tour or transfer, conveyance on office duties,
outstation duties, Helpers in Office, Professional research or development, & purchase and
maintenance of uniform are fully exempt to the extent actually spent.
Leave travel allowance & house rent allowance are exempt to the extent of lower of the
amount actually spent or the prescribed limits.
Allowances for duties at difficult areas. Children education allowance and Children hostel
expenses allowance are exempt to the extent of lower of allowance received or the lump-sum
amount prescribed irrespective of actual expenditure.
Allowances and perquisites paid outside India by the Government to a citizen of India for
rendering service outside India.
Deductions u/s 16: Further, Entertainment allowance can be deducted from the Gross Salary
to the extent provided under section 16(ii).

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Chapter No: 3 Exemptions

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There are various exemptions under the income tax act. They are as follows:

Leave Travel Concessions

Gratuity
Encashment of Leave Salary
Retrenchment Compensation
Retirement Compensation to Employees
Tax on Perquisites Paid by Employer
Payment from Statutory/ Public PF
Payment from Recognized PF
House Rent Allowance
Payment from Superannuation
Pensions to Gallantry Award Winners

Leave Travel Concession [S.10(5)]

It is exempted to the following extent:

In case of an individual,
The value of any travel concession or assistance received by or due to him,
From his employer for himself & 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 the termination of his
service,
Subject to the conditions prescribed as to the number of journeys and the amount
exempt per head.

Family of an individual includes: His spouse & children, his parents, brothers & sisters who
are dependent on the individual.
Rules prescribed:

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Different Situations
Where journey is performed by air

Where journey is performed by rail

Where the places of origin of journey and

destination are connected by rail and journey
is performed by any other mode of transport
Where the places of origin of journey and
destination or part thereof) are not connected
by rail.
Where a recognized public transport exists.
Where no recognized public transport system
exists.

Amount of Exemption
Amount of air economy fare of the National
Carrier by the shortest route or the amount
spent, whichever is less.
Amount of air-conditioned first class rail fare
by the shortest route or the amount spent,
whichever is less.
Amount of air-conditioned first class rail fare
by the shortest route or the amount spent,
whichever is less

First class or deluxe class fare by the shortest

route or the amount spent, which ever is less.
Air conditioned first class rail fare by the
shortest route (as if the journey had been
performed by rail) or the amount actually
spent, whichever is less.

Other Points:
Only 2 journeys in a block of 4 years is exempt- Exemption on the aforesaid basis is available
in respect of 2 journeys performed in a block of four calendar years commencing from 1987.
The current block 2003-2006 runs from January 1, 2011 to December 31, 2014.
Carry-over concession- Any un-availed travel concession(s) during a particular block can be
claimed in the first calendar year of the next block (but in respect of only one journey).

Gratuity:
Gratuity is lump-sum amount paid to an employee, on the basis of the duration of his
employment, on termination of service due to retirement, resignation, death etc. It is exempt
from tax, either fully or partly, depending on the type of employee receiving it. Gratuity
received while still in service is not exempt; it is taxable as salary.

a)
b)

Gratuity to Government Employees:

Any death-cum-retirement gratuity received underThe revised pension rules of the central government,
The central civil services (Pension) Rules, 1972,
Any similar scheme applicable toThe members of civil services of the union,
Holders of defence or civil posts under the union,
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c)
d)
e)
f)

The members of the All India Services,

The members of the civil services of a state,
Holders of civil posts under a state,
The employees of a Local Authority; and
Any retirement gratuity under the Pension Code or Regulations applicable to the
members of the members of the defence services,

Is wholly exempt from tax. In short, the gratuity received by any employee of the Central
State Government(s), Union, Local Authority or the defence services is entirely exempt from
tax.

Gratuity Under Payment of Gratuity Act, 1972

1. A person working in any factory, mine, oil field, plantation, port, railways , & shop or
establishment is covered under the Payment of Gratuity Act, 1972.
2. Any gratuity received by such person is exempt from tax, to the extent of the least of
the following amounts:
o Gratuity actually received
o Rs. 10,00,000, being the notified limit;
o Salary last drawn x 15 days/ 26 days x no of completed years
It should be noted thatI.
II.
III.
IV.

Basically, gratuity is equal to 15 days salary, for every completed year of service.
In case of a seasonal establishment, 7 days salary is taken instead of 15 days;
26 days refer to the working days per month;
Salary includes Basic + Dearness Allowance, but excludes bonus, commission, other
allowances, over time, etc.

Gratuity to any other Employee

1. Any other gratuity receivedo By an employee on retirement, his becoming incapacitated before his
retirement or termination of his employment, including by resignation; or
o By his widow, children or dependent, on his death,
o To the extent of the least of the following amounts is exempt from taxo Gratuity actually received during previous year;
o Sum notified by the Government (Rs.10,00,000 at present);
o Half months salary for each completed year of service, on the basis of the
average salary for the 10 months immediately preceding the month of
retirement.
2. If an employee receives gratuities from more than one employer, in the same previous
year, the total exemption cannot exceed the limit notified by the Government.
3. Similarly, the notified ceiling applies to any gratuity received and exempted in any
earlier previous years by the employee. Any such gratuity exempted earlier shall be

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reduced from the ceiling amount of Rs. 10,00,000, and only the balance can be
claimed, subsequently.
4. Salary for this clause, includes basic salary, dearness allowance and commission at
fixed percentage on turnover achieved by employee.
5. Completed years of service means only completed years; part of year, even if more
than 6 months is to be ignored & not rounded off.
6. Note that while the gratuity under this clause is calculated on the basis of the average
salary for last 10 months, gratuity under Payment of Gratuity Act, 1972 is calculated
on the basis of last salary drawn.

Commutation of Pension:
Pension is the monthly payment by the e-employer to a retired employee which is taxed as
salary. An employee may opt to get a one time lump sum payment in lieu of such monthly
payments. This is known as commutation of pension, which is exempt fully or partly
depending on the category of the employee, as explained below.
Government Employees:
A payment in commutation of pension is fully exempt, if received under

The civil Pensions (Commutations) rules of the central government,

A similar scheme applicable to members of civil services of the Union, holders of
defence or civil posts under the union,
Members of all India Services, defence services, State civil services,
Holders of civil posts under a State,
Employees of a local authority or statutory corporation.

Other Employees:
Any payment in commutation of pension received under any scheme of any other employer is
exempt to the extent, it does not exceed

Where the employee receives any gratuity, the commuted value of 1/3 of the pension
which he is normally entitled to receive.
In any other case, the commuted value of of such pension.

Encashment of Leave Salary:

Leave encashment means cash received by an employee against leave earned but not taken
and accumulated. Leave encashment while in service is taxable. Leave encashment on
leaving a job is exempt as explained below.
Government Employees:
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Any payment received by an employee of the Central Government or State Government as

the encashment of the earned leave to his credit at the time of his retirement, is wholly
exempt from tax.
Other Employees:
In case of non-Government employees, leave salary is exempt to the extent of the least of the
following amounts1. Encashment of the earned leave, not exceeding 30 days per each completed year of
service with the employer from whose services he is retiring, standing to the credit of
the employee at the time of retirement;
2. 10 months average salary, on the basis of the salary drawn for the 10 months
immediately preceding the date of retirement;
3. The amount notified by the government
4. The amount actually received.

Retrenchment Compensation:
Conditions:
1. any compensation received by a workman under the Industrial Disputes Act, 1947 (14
of 1947 ), or under any other Act or Rules, orders or notifications issued there under
or under any standing orders or under any award, contract of service or otherwise,
2. at the time of his retrenchment (dismissal from job), or
the closing down of the undertaking in which he is employed, or
the transfer of services of the workman due to change in the management or
ownership of the undertaking, if his service is interrupted due to such transfer
or his new service conditions are less favourable or the new employer is not
liable to pay retrenchment compensation in respect of the earlier period of
service;
3. Limited upto the amount Calculated u/s 25F(b) the Industrial Disputes Act, or
Notified by the Central Government, whichever is less;
4. Except that no limit is applicable in respect of any compensation received under a
scheme approved by the Central Government.
Amount of Exemption:
The amount is the least of the following:

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1. Amount calculated at 15 days average pay for every completed year of continuous
service or any part thereof in excess of 6 months. Month for this purpose should be
taken as 26 days.
2. Rs. 5,00,000.
3. Retrenchment compensation actually received

Retirement Compensation to Employees

1.
2.

3.
4.
5.
6.

Any amount received or receivable as compensation,

By an employee ofA public sector
Any other company
An authority established under a central, state or provincial act,
A local authority
A co-operative society
A statutory or recognized institution
A notified Institute of Management
State Government
The Centrel Government
A notified institution having importance throughout India or any state
An Indian Institute of Technology.
On his voluntary retirement
Under any scheme framed as per the prescribed guidelines;
Is exempt upto Rs. 5 Lakhs,
Provided that no such exemption was allowed to the assessee in any earlier
assessment year and no relief has been allowed u/s 89

Tax on Perquisites Paid by Employer

1.
2.
3.
4.
5.
6.
7.

In the case of an employee, being an individual

Deriving income by way of non-monetary perquisites
The tax on whole or part of such income
Actually paid by his employer, at the option of the employer
On behalf of such employee
Shall be exmpt from tax
Not withstanding anything contained in section 200 of the Companies Act, 1956

Such tax paid cannot be claimed as business expenditure by the employer, as provided in S.
40(a)(vi)

Payment from Statutory/ Public PF:

This exemption is in respect of17

Any payment to a member from,

A Provident Fund to which the PF Act, 1925 applies,
Or from any other PF setup & notified by the Central Government.

Payment from Recognized PF

This exemption pertains to1. The accumulated balance due to becoming payable,
2. To any employee participating in a recognized provident fund,
3. To the extent provided in rule 8 of part A of the 4th Schedule to the Act.

House Rent Allowance

House rent allowance (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.

House rent allowance (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

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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:
o

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.

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As such, Rs 3,000 per month is the least and will be the exemption allowable for HRA
deduction.

Special Allowance For Expenses (Sec 10 (14)

(i) any such special allowance or benefit, not being in the nature of a perquisite within the
meaning of clause (2) of section 17 , specifically granted to meet expenses wholly,
necessarily and exclusively incurred in the performance of the duties of an office or
employment of profit, 2 [ as may be prescribed, ] 2 to the extent to which such expenses are
actually incurred for that purposes;

(ii) any such allowance granted to the assessee either to meet his personal expenses at the
place where the duties of his office or employment of profit are ordinarily performed by him
or at the place where he ordinarily resides, or to compensate him for the increased cost of
living 3 [ as may be prescribed and to the extent as may be prescribed. ] 3

[ Provided that nothing in sub-clause (ii) shall apply to any allowance in the nature of

personal allowance granted to the assessee to remunerate or compensate him for performing
duties of a special nature relating to his office or employment unless such allowance is related
to the place of his posting or residence; ] 4

1. Substituted by Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. Earlier, clause
(14), as amended by the Finance Act, 1975 w.r.e.f. 1-4-1962, stood as follows:.
"(14) any special allowance or benefit, not being in the nature of an entertainment allowance
or other perquisite within the meaning of clause (2) of section 17, specifically granted to meet
20

expenses wholly, necessarily and exclusively incurred in the performance of the duties of an
office or employment of profit, to the extent to which such expenses are actually incurred for
that purpose.
Explanation: For the removal of doubts, it is hereby declared that any allowance granted to
the assessee to meet his personal expenses at the place where the duties of his office or
employment of profit are ordinarily performed by him or at the place where he ordinarily
resides shall not be regarded, for the purposes of this clause, as a special allowance granted to
meet expenses wholly, necessarily and exclusively incurred in the performance of such
duties;"
2. Substituted by Finance Act, 1995, w.e.f. 1-7-1995. Prior to the amendment it read as
follows:
"as the Central Government may, by notification in the Official Gazette specify."
3. Substituted by Finance Act, 1995, w.e.f. 1-7-1995. Prior to the amendment it read as
follows:
"as the Central Government may, by notification in the Official Gazette, specify to the extent
specified in the notification."
4. Inserted by Direct Tax Laws (Second Amendment) Act, 1989, w.e.f. 1-4-1989.

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Chapter No: 4 Deductions

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The following two deductions from Gross Salary are allowed vide Section 16: (1)
Entertainment Allowance & Professional Tax.
A. Entertainment Allowance:
Only to Govt. Employee:
Entertainment allowance is initially included in Gross Taxable Salary. Thereafter, section 16
(ii) allows a deduction from salaries only to the Government employees to the least of the
following:
a)
b)
c)

1/5th of basic salary

Rs. 5000
Amount of entertainment allowance actually received.
Non Government Employee:

A non-government employee is not entitled to any deduction for entertainment allowance.

Basic Salary:

Baisc salary above would include DA if it forms part of salary, but exclude bonus,
allowances, benefits & perquisites.

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Irrespective of Actual Expenses:

The deduction is allowed for the EA as such, irrespective of the actual amount spent on
entertainment by the employee.
B. Professional Tax:
Section 16 (iii)allows a deduction from salaries of the amount of a tax on employment levied
by or under any law by the State Government under Arcticle 276 of the Constitution.

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