Please remember that these notes do NOT

replace a textbook. They are only meant to

help you follow along in class and to help us
finish the syllabus with the most efficient
use of time. For your exams please study
from a textbook.
While every care has been taken to
provide current and correct information, I
cannot guarantee the accuracy of the
material herein, because typographic and
human errors are always possible; another
reason why it is best to rely on textbooks
for the exam.
Classification of Heads of Income S. 14
S 14 classifies all income into one of 5 heads:
1.
2.
3.
4.
5.

Salaries Section 15-17

Income from House Property Sections 22-17
Profits and gains of business or profession Section 28-44DB
Capital Gains Section 45-55A
Income from other sources Section 56-59

The aggregate of taxable income under all 5 heads, together with clubbed
income or deemed income and after giving effect to the set-off of the current
year or the carried forward losses shall be known as Gross Total Income. Gross
total income reduced by Chapter VIA Deductions results in total income.
Section 14A(1) states clearly that no deduction shall be allowed in respect of
expenditure incurred by the assessee in relation to income which does not form
part of total income under this Act.

Chapter IVA Salaries Sections 15 17

1. Section 15 Charging section

2. Section 16 Deductions
a. Entertainment allowance and
b. Profession Tax
3. Section 17 Definitions
a. Salary,
b. Perquisites
c. Profits in lieu of salary
4. Valuation of Perquisites Section 17(2) read with Rule 3
a. Value of rent free accommodation
b. Value of concession in rent
c. Value of benefit or amenity in the case of specified employee
d. Any sum paid by the employer of behalf of the employee
e. Any premium towards LIC policy or contract of annuity
f. Value of specified security or sweat equity shares
g. Any contribution to approved superannuation fund
5. Exemptions
a. Section 10(5) to 10(14)
6. Income Tax Rules
a. 2A HRA 10(13A)
b. 2B LTC/LTA 10(5)
c. 2BA Voluntary Retirement or Superannuation 10(10C)
d. 2BB Special Allowances 10(14)

Chargeability Section 15
Any amount due to or received by an employee including arrears of salary
from an employer or former employer and falling within the purview of the
meaning of the term Salary is chargeable to tax under the head Salaries.
However, the term Salary is not exhaustively defined, but is inclusively defined
under Section 17(1).

Meaning of Salary
Section 17(1) defines salary to include1.
2.
3.
4.
5.
6.
7.
8.

Wages
Any annuity or pension
Any gratuity
Any fees, commissions, perquisites or profits in lieu of or in addition to any
salary or wages
Any advance of salary
Leave encashment
The annual accretion to recognised provident fund to the extent of
a. Employers contribution in excess of 12% of salary
b. Interest credited to the RPF in excess of 9.5% p.a.
The accumulated transferred balance from unrecognised provident fund
account to a recognised provident fund account to the extent it is
chargeable

9. The contribution made by the Central Government or any other employer

in the previous year to the account of an employee under a pension
scheme referred to in Section 80CCD

Self Study Employer-Employee relationship, Year of chargeability, Surrender

of salary, Tax-free salary

Profits in lieu of salary Section 17(3)

This includes
1. Terminal Compensation The amount of any compensation due to or
received by an assessee from his employer or former employer at or in
connection with
a. Termination of employment or
b. Modification of the terms and conditions of employment
2. Payment from an unrecognised provident fund or superannuation fund
any payment due to or received by the assessee from his employer or
former employer or from PF or any other fund to the extent to which it
does not consist of contributions or interest of such contributions by the
assessee.
3. Payment under a Keyman Insurance Policy Any sum received under a KIP
including the sum allocated by way of bonus on such policy shall be
considered profits in lieu of salary
4. Any amount due or received, whether in lump sum or otherwise by an
assessee form any person
a. Before his joining any employment with that person or
b. After the cessation of his employment with that person
5. Any other sum received by the employee from the employer
However, the following will not be termed profits in lieu of salary to the
extent they are exempt under S. 10:
1.
2.
3.
4.
5.
6.
7.

Death-cum-retirement gratuity S. 10(10)

Commuted value of pension S. 10(10A)
Retrenchment compensation received by a workman S. 10(10B)
Payment received from a statutory provident fund S. 10(11)
Payment received from a recognised provident fund S. 10(12)
Any payment from an approved superannuation fund S. 10(13)
House Rent Allowance S. 10(13A)

Deductions S. 16
The following need to be deducted from gross salary to compute income
chargeable under the head Salaries:
1. Deduction for entertainment allowance S. 16(ii)
2. Deduction for profession tax S. 16(iii)

Entertainment allowance is not eligible for exemption, only deduction. This

deduction is available only in the case of Government employees, not others.
The extent is to the least of the following:
a. Rs 5,000 or
b. 1/5th of salary or
c. Actual entertainment allowance received for the previous year.
Salary for the purpose of entertainment allowance means only basic salary
and excludes all allowances, benefits and perquisites. Even dearness allowance
should not be included.
Profession tax Deduction is allowed in respect of any sum paid by the
assessee on account of a tax on employment leviable by or under any law. In
case the profession tax is paid by the employer on behalf of the employee, the
amount so paid should be included in gross salary as a perquisite and then
deducted. The amount of profession tax levied by a local authority shall not
exceed Rs 2,500 p.a. Art 276(2) of the Constitution.

Exemptions
Value of travel concession or assistance S. 10(5) read
with Rule 2B
Value of travel concession or assistance received by or due to an individual
from his employer or former employer for himself and his family in connection
with his proceeding:
a. On leave to any place in India
b. To any place in India after retirement from service or after the termination
of his service
Shall be exempt
Family, here, means a) spouses and children and b) parents, brothers and
sisters of the individual wholly or mainly dependent on the individual. The
exemption shall not be available to more than two surviving children of an
individual after 1st October 1998.
The exemption shall be available in respect of 2 journeys performed in a block
of 4 calendar years commencing from 1986. The current relevant block is 201417. One trip can be carried forward to the immediately succeeding block.
Journey performed by
1. Air

2. Any other mode

a. Where rail service is available

Exemption
Amount not exceeding the air economy
fare of the national carrier (IA or AI) by
the shortest route to the place of
destination
Amount
not
exceeding
the
air
conditioned first class rail fare by the

b. Where rail service is not

available
i.
And recognised public
transport system does
not exist
ii.
But recognised public
transport system exists

shortest route to the place of

destination
Amount
not
exceeding
the
air
conditioned first class rail fare by the
shortest route as if the journey had
been performed by rail
An amount not exceeding the first class
or deluxe class fare on such transport
by the shortest route to the place of
destination

Exemption in case of a foreign national S. 10(6)

In the case of an individual who is not a citizen of India, the following shall be
exempt:
1. the remuneration received by him as an official, by whatever name called,
of an embassy, high commission, legation, commission, consulate or the
trade representation of a foreign State, or as a member of the staff of any
of these officials, for service in such capacity :
Provided that the remuneration received by him as a trade commissioner
or other official representative in India of the Government of a foreign
State (not holding office as such in an honorary capacity), or as a member
of the staff of any of those officials, shall be exempt only if the
remuneration of the corresponding officials or, as the case may be,
members of the staff, if any, of the Government resident for similar
purposes in the country concerned enjoys a similar exemption in that
country :
Provided further that such members of the staff are subjects of the country
represented and are not engaged in any business or profession or
employment in India otherwise than as members of such staff
2. the remuneration received by him as an employee of a foreign enterprise
for services rendered by him during his stay in India, provided the
following conditions are fulfilled
(a) the foreign enterprise is not engaged in any trade or business in
India ;
(b) his stay in India does not exceed in the aggregate a period of ninety
days in such previous year ; and
(c) such remuneration is not liable to be deducted from the income of the
employer chargeable under this Act
3. any income chargeable under the head "Salaries" received by or due to
any such individual being a non-resident as remuneration for services
rendered in connection with his employment on a foreign ship where his
total stay in India does not exceed in the aggregate a period of ninety
days in the previous year

4. the remuneration received by him as an employee of the Government of a

foreign State during his stay in India in connection with his training in any
establishment or office of, or in any undertaking owned by,
(i) the Government ; or
(ii) any company in which the entire paid-up share capital is held by
the Central Government, or any State Government or
Governments, or partly by the Central Government and partly by
one or more State Governments ; or
(iii) any company which is a subsidiary of a company referred to in
item (ii) ; or
(iv) any corporation established by or under a Central, State or
Provincial Act ; or
(v) any society registered under the Societies Registration Act, 1860
(14 of 1860), or under any other corresponding law for the time
being in force and wholly financed by the Central Government,
or any State Government or State Governments, or partly by the
Central Government and partly by one or more State
Governments ;

Indian citizens employed abroad by the Government of

India S 10(7)
Any allowance or perquisite paid or allowed as such outside India by the
Government to a citizen of India for rendering service outside India is exempt.

Exemption in case of Chairman or Member of UPSC S.

10(45)
Gratuity S. 10(10)
1. Government employee any death-cum-retirement gratuity received by
Government employees is wholly exempt from tax
2. Employees covered by the Payment of Gratuity Act 1972: Any gratuity
received by such an employee is exempt to the extent of the least of the
following:
a. Rs 10,00,000 or
b. 15 days salary (out of 26 days) based on the last drawn salary for
each completed year of service or part of the year in excess of 6
months or

c. Gratuity actually received

Here, salary means basic salary and dearness allowance
3. Any other employee any gratuity received on death, retirement,
termination or resignation is exempt to the extent of the least of the
following:
a. Rs 10,00,000
b. Half months salary (on the basis of last 10 months average salary
immediately preceding the month in which any such event occurs)
for each completed year of service (fraction to be ignored) or
c. Gratuity actually received.
Here, salary means basic salary, dearness allowance provided in the terms
of employment and commission as a percentage of turnover achieved by
the employee. Basic salary shall be average of last 10 months salary.
Gratuity received during the period of service is always taxable. Where the
gratuity is received from two or more employers in the same previous year, the
exemption cannot exceed the limits.

Commuted pension Sec 10(10A)

Uncommuted pension refers to pension periodically received by the
employee. This is taxable in the hands of Government and non-government
employees (S.15). Commuted pension refers to a lump sum amount taken by
commuting the pension or part of the pension.
1. Commuted pension received by a Government employee is wholly exempt.
2. For non-government employees, the exemption is as follows:
a. If the employee receives gratuity, 1/3 rd of the amount of commuted
pension he would have received had he commuted the whole 100%
of the pension
b. If the employee is not in receipt of gratuity, of the amount of
commuted pension he would have received had he commuted the
whole 100% of the pension
Illustration 1:
On 30 th June 2015, Mr Santhosh retires from government service
and gets pension of Rs 3,000 p.m. up to 31.01.16. With effect from 1.2.16, he
gets 1/3rd of his pension commuted for Rs 1,20,000. Determine taxable pension
Answer: Uncommuted pension before date of commutation

Rs 3000 x 7 (30th June to 31st Jan)

21,000
Uncommuted pension after the date of commutation
3000 x 2/3 (1/3 is commuted) x 2 (Feb and March)
4,000
Commuted pension

1,20,000

Less: Exempt u/s 10(10A)

1,20,000

Taxable pension

25,000

Illustration 2: Mr Kamath retires from X Ltd on 31/10/14. He gets pension of Rs

2,000 p m up to 31/10/15. With effect from 1 st Nov 2014, he gets 60% of his
pension commuted for Rs 30,000. He does not receive gratuity. Calculate taxable
pension.
Answer: Uncommuted pension before date of commutation
Rs 2,000 x 7 (april 2015 to Oct 2015)
14,000
Uncommuted pension after the date of commutation
Rs 2000 x 5 (Nov 2015 to Mar 2016) x 40%
4,000
Commuted pension

30,000

Exemption u/s 10(10A) (he does not receive gratuity

So half his pension is exempt)(for 60% commutation
He receives Rs 30,000; so for 100% commutation, he
Receives x. X = 100/60x30000)
5,000

25,000

Leave Salary S 10(10AA)

1. Government employee: any amount received as cash equivalent of leave
in respect of period of earned leave to his credit at the time of retirement
whether on superannuation or otherwise is exempt from tax
2. Non-Government employee: Leave salary is exempt from tax to the extent
of the least of the following

a. The cash equivalent of the leave (on the basis of average of last 10
months salary to the credit of the employee at the time of
retirement (calculated at 30 days credit for each completed year of
service)
b. The amount specified by the government Rs 3,00,000
c. 10 months salary (on the basis of average of last 10 months salary)
or
d. Leave encashment actually received.
Leave encashment received during the period of service is always taxable.
Salary for this purpose means basic salary, dearness allowance if provided in the
terms of employment and commission as a percentage of turnover achieved by
the employee.

Retrenchment compensation Section 10(10B)

Compensation received by a workman at the time of retrenchment is exempt
to the extent of the lower of the following:
1. Amount calculated under the Industrial Disputes Act, 1947 or
2. Rs 5,00,000
Section 25F of the ID Act provides for payment of retrenchment compensation
equivalent to 15 days average pay for every completed year of continuous
service or any part thereof in excess of 6 months.

Voluntary retirement or separation scheme S. 10(10C)

read with Rule 2BA
(Applicable Assessees/Eligible Employees Self-study)
Least of the following is exempt:
1. Last drawn salary x 3 x completed years of service OR Last drawn salary x
remaining months of service whichever is higher
2. Rs 5,00,000 OR
3. Actual compensation received
Salary here means last drawn salary comprising of basic salary, dearness
allowance if provided in the terms of employment and commission as a
percentage of turnover.

Tax on non-monetary perquisites S 10(10CC)

Employer has the option under S. 192(1A) to bear the tax on non-monetary
perquisites on behalf of the employee. In this case, the income for which tax is so
borne shall be exempt in the hands of the employee.

Statutory or Public Provident Fund Section 10(11)

Any payment from an SPF or a PPF the contributions qualify for deduction
under S 80C and the entire interest earned is exempt here.

Recognised Provident Fund S 10(12) r/w Rule 8, Part A,

Fourth Schedule
The accumulated balance due and becoming payable to an employee
participating in a Recognised Provident Fund shall be exempt in the following
cases:
1. In the case of an employee who has rendered continuous service for 5
years or more
2. In the case of an employee whose service was terminated because of illhealth, or by the contraction or discontinuance of the employers business
or other cause beyond the control of the employee
3. In the case of an employee who obtains employment with any other
employer who maintains a RPF to which the accumulated balance due and
payable is transferred
Salary here is basic salary, dearness allowance provided in terms of
employment and commission as a percentage of turnover.

Approved superannuation fund S. 10(13)

Any payment from an approved superannuation fund is exempt from tax if it
is made:
1. On the death of a beneficiary
2. To an employee in lieu of or in commutation of an annuity on his
retirement at or after a specified age or on his becoming incapacitated
prior to such retirement
3. By way of refund of contributions on the death of a beneficiary.

House Rent Allowance Section 10(13A) read with Rule

2A
HRA is exempt to the least of the following:
1. Excess of rent paid over 10% of salary due for the relevant period or
2. If the accommodation is in Mumbai, Calcutta, Delhi or Chennai 50% of
salary and in any other place 40% of salary due for the relevant period
3. Actual allowance received for the relevant period
Exemption is not available to an assessee who lives in his own house or in a
house without rent. Salary means basic salary, dearness allowance if provided in
the terms of employment and commission as a percentage of turnover.

Special Allowances Sec 10(14) read with Rule 2BB

1. Any allowance granted and spent to meet the cost of
a. Travel on tour or transfer
b. Ordinary daily charges incurred on account of absence from normal
place of duty
c. Conveyance allowance granted to meet the expenditure incurred on
conveyance in the performance of the duties provided free
conveyance is not provided by the employer
d. Expenditure incurred on a helper in the performance of duties
e. The academic, research and training pursuits in educational and
research institutions
f.

Purchase or maintenance
performance of duties.

of

uniform

for

wear

during

the

2. Any allowance granted to an employee working in the transport system to

meet his personal expenses 70% of allowance or Rs 10,000pm
whichever is less
3. Transport allowance granted to a visually or orthopedically handicapped
employee Rs 3,200 pm.
4. Children education allowance up to Rs 100 pm per child up to a
maximum of 2 children

5. Hostel expenditure of child of employee Rs 300 pm per child up to a

maximum of 2 children
6. Composite hill compensatory allowance Rs 300 p m if at a height of 1000
metres or more above sea level, J and K Siachen area 7,000 pm
7. Tribal area allowance Rs 200 pm if place of employment is in Assam,
Bihar, Karnataka, MP, Odisha, Tripura, TN, UP and WB.
8. Border
area
Allowance/Remote
area
allowance/difficult
allowance/disturbed area allowance Depends on notified place.

area

Valuation of Perquisites S. 17(2) r/w Rule 3

According to S. 17(2) Perquisite includes:
1. Rent-free accommodation
2. Concession in the matter of rent
3. Value of benefit or amenity grated or provided free of cost or at
concessional rate
4. Sum paid by the employer in respect of any obligation on behalf of the
employee
5. Sum paid by the employer for life assurance or annuity contract for the
employee
6. Specified equity or sweat equity shares free of cost or at concessional
rates
7. Contribution to an approved superannuation fund in excess of Rs 1 lakh
A specified employee is:
1. A director employee
2. An employee who has substantial interest 20% voting
3. An employee whose salary exceeds Rs 50,000 without including all nonmonetary benefits; monetary benefits exempt under s. 10 and deductions
under S. 16(ii) and (iii)
The following Medical facilities are not taxable perquisites:

1. Medical facilities provided to an employee or his family in a hospital

maintained by the employer
2. Sum paid by the employer in respect of expenditure actually incurred by
an employee in in a specified hospital
3. Premium paid for group medical insurance covered under S. 80D or
reimbursement thereof
4. Reimbursement of actual medical expenditure not exceeding Rs 15,000
per year
5. Actual expenditure incurred by employee for medical treatment outside
India to the extent permitted by the RBI and if the employees total
income does not exceed Rs 2,00,000
Here, family means the spouse and children and parents, brothers and sisters
of the individual wholly or mainly dependent on the individual.

Value of accommodation
1. Step 1 Determine the value of unfurnished accommodation
2. Step 2 determine the value of furniture at the prescribed rates, if the
accommodation is furnished

Rent-free accommodation

Employee

Value of perquisite

1. Central/State Government

Licence fee determined

respective Government

2. Others

If the population of the place as per

2001 census is:

a. Accommodation
the employer

owned

by

the

by
a. Less than 10 lakhs 7.5% of
salary
b. 10-25 lakhs 10% salary
c. More than 25 lakhs 15% salary

iii.

Accommodation
is
taken on lease by the
employer

Least of
a. Actual amount of least rental

b. 15% of salary
For the period
employee
3. Accommodation provided by an
employer in a hotel (for not less
than 15 days)

occupied

a. 24%
salary
receivable

by

the

received

or

b. Actual charges paid or payable

Whichever is lower
Accommodation is defined to include a house, flat, farm house or part
thereof or accommodation in a hotel, motel, service apartment, guest house,
caravan, mobile home, ship or other floating structure.
Salary includes basic pay, allowances, bonus or commission.

Value of Furnished accommodation: Value of unfurnished accommodation

+ 10% of original cost of furniture owned and provided by the employer + actual
lease charges of leased furniture. Furniture includes electrical appliances.

Value of accommodation provided at concessional rate: Value as

calculated above amount collected by the employer

Value of benefit or amenity provided by the employer in

respect of any obligation for the employee
This could be for gas, electricity, water supply, domestic servant etc

Perquisite

in

respect

of

domestic

servant: sweeper, gardener,

watchman or personal attendant; actual cost; if the employee pays any amount,
deduct it

Perquisite in respect of gas, electricity or water for household

consumption: if employers own sources manufacturing cost; outside agency
amount paid; if the employee pays any amount, deduct it

Perquisite for educational facilities: if employer provides free or

concessional education actual expenditure; if the employer owns and maintains
the educational institution reasonable cost of such education in a comparable
institution, if the expense is less than Rs 1000 pm the whole is exempt. If the
employer pays a scholarship to the employees child, it is a perquisite, but
exempt under S. 10(16).

Perquisites applicable to all employees

Interest-free or concessional loans: at the sum of interest charged per

annum by SBI

Usage of moveable assets owned by the employer: 10% p.a. or the

cost of the asset not to assets covered under other heads, not laptops and
computers, not motor cars

Motor Cars
1. If the employee owns and pays for the car it is not a perquisite
2. If the car is provided by the employer, is used exclusively for official
purposes not a taxable perquisite
3. The taxability arises when the car is partly or wholly used for personal
uses

Car

Expenses

Wholly
use

personal

Employee

Employer

Actual expenses

Partly
use

personal

Actual amount of
expenditure Rs
1800 p.m. (for
1.6l) or 2,400 p.m.
Driver salary
900 pm

Employer

Employer

Employee

Employer

Rs

Wear and tear or

hire
charges,
driver
salary,
running
and
maintenance

Up to 1.6 l Rs
600 pm Above
900 pm.

Wear and tear or

hire
charges,
driver
salary,
running
and
maintenance

amount
charged
by employee

Up to 1.6 l Rs
1800 pm. Above,
Rs 2,400 pm.

Driver salary 900

pm

Driver salary 900

pm

Gift Rule 3(7)(iv)

The value of any gift or voucher or token in lieu of which such gift may be
received by the employee or member of his household on ceremonial occasions
or otherwise shall be the amount of the gift. If the value is below Rs 5000, the
perquisite is nil. If the value is greater than 5000, the entire amount is taxable.

Any other amenity R. 3(ix)

Cost to the employer under an arms length transaction

Self-Study (Pages 131-133 of Manoharan)

1. Free or concessional tickets
2. Travelling, touring and accommodation R 3(7)(ii)
3. Free or concessional meal R 3(7)(iii)
4. Credit card expenses R 3(v)
5. Membership in club R 3(vi)