PROBLEMS ON INCOME FROM SALARIES
P1. Mr.Z has joined ICC Ltd. on 1st July 2004 in the scale of Rs.15,000-1,500-21,000-
2,500-31,000. Compute gross salary for the previous year 2007-08.
Solution:
Previous Year: 2007-08
Salary for (i) April 2007 to June 2007 = 18,000 x 3 = 54,000
(ii) July 2007 to March 2008= 19,500 x 9 = 1,75,500
Gross Salary 2,29,500
Workings:
Previous Year April to June July to March
2004-05 Nil 15,000
2005-06 15,000 16,500
2006-07 16,500 18,000
2007-08 18,000 19,500
P2. Mr.Khan is getting a salary of Rs.12,000 p.m. w.e.f. 1.4.2007. He is promoted w.e.f.
31.12.2005 and got arrears of Rs.75,000. Bonus for the year 2007-08 is Rs.15,000
remains outstanding but bonus of Rs.12,000 for the year 2006-07 was paid on 1st January
2008. In March 2008, he got two months salary i.e. April and May 2008 in advance.
Compute the gross salary for the assessment year 2008-09.
Solution:
Gross Salary for the Assessment Year 2008-09
Salary : Rs.12,000 x 12 1,44,000
Arrears of Salary 75,000
Bonus for the year 2007-08: (Receivable) -----
Bonus for the year 2006-07: (Received) 12,000
Advance of Salary: April & May 2008 (12,000 x 2) 24,000
Gross Salary 2,55,000
P3. Mr.Pradip, a foreign technician is employed with an Indian company. His contract of
service was approved by the Government. He was in receipt of bonus from the said
Company where he is working. The Assessing Officer subjected the amount to tax on the
ground that bonus receipt falls outside the purview of the contract of service. Is the
Assessing Officer justified?
Answer: U/s 9(1)(ii) salary earned in India is deemed to accrue or arise in India and is
taxable in India.
The salary and bonus paid to a foreign technician for services rendered in India is taxable
in India and the same is not entitled for any exemption from the Assessment Year 2005-06
onwards.
P4. Amal Kumar, an Indian citizen, is posted in the Indian High Commission at Nairobi
during the previous year 2007-08.
His emoluments consist of Basic Pay of Rs.1,50,000 per month and overseas allowance of
Rs.,60,000 per month. Besides, he is entitled to & fro journey to India and also use
Government’s car at Nairobi. He has no taxable income except salary income stated above.
Compute tax liability if (i) he is a non-resident during the previous year 2007-08 and (ii)
he is a foreign citizen.
Solution:
(1) U/s 9(1)(iii), Salary paid by the Government of India to an Indian citizen for
services rendered outside India is deemed to accrue or arise in India and is
therefore taxable in India.
(2) U/s 10(7), allowances or perquisites paid by the Government of India to an Indian
citizen for services rendered outside India, is fully exempt from tax.
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(3) Computation of Taxable Salary for the Previous Year 2007-08
Particulars Rs Rs
Salary (1,50,000 x 12)
Overseas Allowance ( 60,000 x 12)
Less: Exempt u/s 10(7)
Gross Salary
Less: Deduction u/s 16
Income under the head Salaries
7,20,000
7,20,000
18,00,000
Nil
18,00,000
Nil
18,00,000
HOUSE RENT ALLOWANCE [ Sec.10(13A) Rule 2A]
P5. A, is entitled to a basic salary of Rs.5,000 p.m. and dearness allowance of
Rs.1,000p.m., 40% of which forms part of retirement benefits. He is also entitled to HRA
of Rs.2,000 p.m. He actually pays Rs.2,000 p.m. as rent for a house in Delhi. Compute
the taxable HRA.
Computation:
Salary for HRA= Basic Pay + D.A.(considered for retirement benefits) + Commission ( if
received as a fixed percentage on turnover as per terms of employment)
= (5,000 x 12) + (40% x 1,000 x 12)= 64,800
Taxable HRA:
Particulars Rs Rs
Amount received during the financial year for HRA 24,000
Less: Exemption u/s 10(13A) Rule 2A Least of the
followings:
(a) Actual amount received
(b) 50% of Salary of Rs.64,800
(c) Rent paid less 10% of Salary
[ 2,000 x 12 – 10% of 64,800]
24,000
32,400
17,520
17,520
Taxable HRA 6,480
P6. X, is employed at Delhi as Finance Manager of R Ltd. The particulars of his salary for
the previous year 2007-08 are as under: Basic Salary Rs.16,000 p.m.. Dearness allowance
Rs.12,000 p.m. Conveyance Allowance for personal purpose Rs.2,000p.m.; Commission
@2% of the turnover achieved which was Rs.9,00,000 during the previous year and the
same was evenly spread. HRA Rs.6,000 pm. The actual rent paid by him Rs.5,000 pm for
an accommodation at till 31.12.07. From 1.1.08 the rent was increased to Rs.7,000 pm.
Compute taxable HRA.
Note: If there is an increase in rent paid, it is advisable to calculate the exemptions
separately based on the time period. Rent before and after increase.
Salary for HRA (for 9 months)= Basic Pay + DA(considered for retirement benefits) +
Commission ( if received as a fixed percentage on turnover as per terms of employment)
= (16,000 x 9) + (12,000 x 9) + (2% of 9,00,000 x 9/12) = 2,65,500
Taxable HRA: (April to December 2007). Total time=9 months
Particulars Rs Rs
Amount received during the financial year for HRA 54,000
Less: Exemption u/s 10(13A) Rule 2A. Least of the
followings:
(a) Actual amount received
(b) 50% of Salary
(c) Rent paid less 10% of Salary
[ 5,000 x 9 – 10% of 2,65,500]
54,000
1,32,750
18,450
18,450
Taxable HRA 35,550
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Salary for HRA (for 3 months)= Basic Pay + DA(considered for retirement benefits) +
Commission ( if received as a fixed percentage on turnover as per terms of employment)
= (16,000 x 3) + (12,000 x 3) + (2% of 9,00,000 x 3/12)=88,500
Taxable HRA:
Particulars Rs Rs
Amount received during the financial year for HRA 18,000
Less: Exemption u/s 10(13A) Rule 2A. Least of the
followings:
(a) Actual amount received
(b) 50% of Salary
(c) Rent paid less 10% of Salary
[ 7,000 x 3 – 10% of 88,500]
18,000
44,250
12,150
12,150
Taxable HRA 5,850
P7. Z is employed in A Ltd. As on 31.3.08, his basic salary Rs.6,000 p.m. He is also
entitled to a dearness allowance of 50% of basic salary. 70% of the dearness allowance is
considered for retirement benefits. The company gives him HRA Rs.3,000pm. With effect
from 1/1/07 he receives an increment of Rs.1,000 in his basic salary. was staying with his
parents till 31.10.2007. From 1.11.07 he takes an accommodation on rent in Delhi and
pays Rs.2,500 pm as rent for the accommodation. Compute taxable HRA for the
assessment year 2008-09.
Computation:
Salary for the purpose of HRA shall cover the time period for which the assessee, who is in
receipt of HRA, resided in a rented accommodation and the rent paid by such assessee, is
more than 10% of salary.
Salary for HRA (for 5 months)= Basic Pay + DA(considered for retirement benefits) +
Commission ( if received as a fixed percentage on turnover as per terms of employment)
Basic Pay = (5,000 x 2) +(6,000 x 3) = 28,000
DA = 50% of Basic Pay x 70% forming part of retirement benefits
[ 50 % x 28,000 x 70%] = 9,800
Total Salary for HRA 37,800
Taxable HRA:
Particulars Rs Rs
Amount received during the financial year for HRA
(3,000 x 12)
36,000
Less: Exemption u/s 10(13A) Rule 2A.
Least of the followings:
(d) Actual amount received
(e) 50% of Salary
(f) Rent paid less 10% of Salary
[ 2,500x 5 – 10% of 37,800]
36,000
18,900
8,720
8,720
Taxable HRA 27,280
GRATUITY
P8. Mr. Hari retires on 15th October2007, after serving 30 years and 7 months. He gets
Rs.3,80,000 as gratuity. His salary details are given below:
FY 2007-08 Salary Rs.16,000
pm
D.A. 50% of salary. 40% forms part of retirement
benefits.
FY 2006-07 Salary Rs.15,000
pm
D.A. 50% of salary. 40% forms part of retirement
benefits
Determine his gross salary in the following cases:
(i) He retires from government service
(ii) He retires from seasonal factory in a private sector, covered under
Payment of Gratuity Act,1972.
(iii) He retires from non-seasonal factory, covered by Payment of
Gratuity Act,1972
(iv) He retires from private sector, not covered by payment of Gratuity
Act
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Computation:
(i) The amount of gratuity received as a Government employee is fully exempt
from tax u/s 10(10)(i)
(ii) As an employee of a seasonal factory, in a private sector, covered under the
Payment of Gratuity Act,1972
Computation of Taxable Gratuity
Particulars Rs Rs
Amount received as Gratuity 3,80,000
Less: Exemption u/s 10(10)(ii) Least of the
followings:
(i)Actual amount received
(ii)7/26 x Last drawn salary x No. of years of
completed service or part thereof in excess of 6
months [ 31 x 7/26 x 24,000]
(iii)Maximum Limit
3,80,000
2,00,308
3,50,000
2,00,308
Taxable Gratuity 1,79,692
(iii) As an employee of a non-seasonal factory, covered by Payment of Gratuity
Act,1972
Computation of Taxable Gratuity
Particulars Rs Rs
Amount received as Gratuity 3,80,000
Less: Exemption u/s 10(10)(ii) Least of the
followings:
(i)Actual amount received
(ii)15/26 x Last drawn salary x No. of years of
completed service or part thereof in excess of 6
months [ 15/26 x 31 x 24,000]
(iii)Maximum Limit
3,80,000
4,29,231
3,50,000
3,50,000
Taxable Gratuity 30,000
Note: Salary = Basic Pay + Dearness Allowance
In case of seasonal employment, instead of 15 days, 7 days shall be
considered.
(iv) As an employee of a private sector, not covered by Payment of Gratuity
Act,1972
Computation of Taxable Gratuity
Particulars Rs Rs
Amount received as Gratuity 3,80,000
Less: Exemption u/s 10(10)(iii) Least of the
followings:
(i)Actual amount received
(ii)1/2 x Average salary x No. of fully completed
years of service
[ ½ x 18,720 x 30]
(iii)Maximum Limit
3,80,000
2,80,800
3,50,000
2,80,800
Taxable Gratuity 99,200
Note: Salary = 10 months average salary preceeding the month of retirement.
= Basic Pay + Dearness Allowance considered for retirement benefits +
commission (if received as a fixed percentage on turnover)
Salary for the months December’06 till September ’07 shall have to be considered.
Basic Salary: Rs.
December ’06 to March ’07 = 15,000 x 4 = 60,000
April ’07 to September ’07 = 16,000 x 6 = 96,000
Total Basic Salary 1,56,000
Add: D.A.[ 50% of 1,56,000 x 40%, forming part of
superannuation benefits] 31,200
Salary for 10 months 1,87,200
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Therefore, Average salary for 10 months = 1,87,200/10 = 18,720
P9. Mr.Surya was an employee of IAWCI. After 38 years of service, he retired on 29.2.08.
He was drawing a monthly salary of Rs.15,000 in 2005, Rs.16,500 in 2006 and Rs.18,000
from 1.1.07 to 29.2.08. On retirement he received a gratuity of Rs.4,00,000. Compute
taxable gratuity.
Computation: Assuming employee not covered by Payment of Gratuity Act,1972
Computation of Taxable Gratuity
Particulars Rs Rs
Amount received as Gratuity 4,00,000
Less: Exemption u/s 10(10)(iii) Least of the
followings:
(i)Actual amount received
(ii)1/2 x Average salary x No. of fully completed
years of service
[ ½ x 18,000 x 38]
(iii)Maximum Limit
4,00,000
3,42,000
3,50,000
3,42,000
Taxable Gratuity 58,000
Note: Salary = 10 months average salary preceeding the month of retirement.
= Basic Pay + Dearness Allowance considered for retirement benefits +
commission (if received as a fixed percentage on turnover)
In this case, Average salary for 10 months preceeding the month of retirement is
Rs.18,000 only.
PENSION
P10. Mr. King is getting a salary of Rs.5,400 pm since 1.1.07 and dearness allowance of
Rs.3,500 pm, 50% of which is a part of retirement benefits. He retires on 30 November
2007 after 30 years and 11 months of service. His pension is fixed at Rs.3,800 pm. On 1st
February 2008 he gets 3/4ths of the pension commuted at Rs.1,59,000. Compute his gross
salary for the previous year 2007-08 in the following cases:
(i)If he is a government employee, getting gratuity of Rs.1,90,000
(ii)If he is an employee of a private company, getting gratuity of Rs.1,90,000
(iii)If he is an employee of a private company but gets no gratuity.
Computation:
Previous Year 2007-08. Tenure of Service: 1.4.07 to 30.11.07 = 8 months
Post-retirement period: December’07 to March ‘08= 4 months
Particulars Case (i) Case (ii) Case (iii)
Salary 43,200 43,200 43,200
D.A 28,000 28,000 28,000
Taxable Gratuity Exempted 82,750 Nil
Uncommuted Pension [ (3,800 x 2) +
(950 x 2)]
9,500 9,500 9,500
Commuted Value of Pension Exempted 88,333
Gross Salary
Case(ii) Gratuity received by an employee of a private company Rs.
Actual amount received 1,90,000
Less: Exempted amount(least of the followings):
(i) Actual amount received 1,90,000
(ii) ½ x Avg.Salary x No.of years of
Completed service
[ ½ x 7,150 x 30] 1,07,250
(iii) Maximum Limit 3,50,000 1,07,250
Taxable Gratuity 82,750
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Commuted Value of Pension
(Non-govt employee, gratuity received)
Actual commuted value of pension received 1,59,000
Less: Exempted u/s 10(10A)
1/3rd of Full Value of Commuted Pension
[ 1/3 x 2,12,000] 70,667
Full Value of Commuted Pension
Amount received on commutation
Percentage of pension commuted
= 1,59,000 / 75% = 2,12,000
Taxable Commuted Value of Pension 88,333
Case(iii) Commuted Value of Pension
(Non-govt employee, gratuity not received)
Actual commuted value of pension received 1,59,000
Less: Exempted u/s 10(10A)
1/2 of Full Value of Commuted Pension
[ 1/2 x 2,12,000] 1,06,000
Full Value of Commuted Pension
Amount received on commutation
Percentage of pension commuted
= 1,59,000 / 75% = 2,12,000
Taxable Commuted Value of Pension 53,000
LEAVE ENCASHMENT
P11. Mrs. Vandana retires on 16th October 2007 after 30 years and 8 months of service.
Salary structure is given below:
FY 2007-08 Salary Rs.15,000
pm
D.A.Rs.7,500 pm
FY 2006-07 Salary Rs.12,000
pm
D.A.Rs.6,000 pm
40%of dearness allowance forms a part of superannuation benefits. Record of Earned
Leave is given below:
Leave allowed for one year of completed service -20 days; Leave taken while in
service-150 days; Leave encashed during the year-60 days.
Determine the gross salary in the following cases:
(i) He retires from government service
(ii) He retires from the service of Delhi Municipal Corporation
(iii) He retires from the service of Life Insurance Corporation of India
(iv) He retires from private sector
Particulars Case(i) Case(ii) Case(iii) Case(iv)
Salary for 6months & 16 days 98,000 98,000 98,000 98,000
Dearness Allowance 49,000 49,000 49,000 49,000
Taxable amount of Leave encashment Exempted 1,24,980 1,24,980 1,24,980
Gross Income from Salary 1,47,000 2,71,980 2,71,980 2,71,980
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Working Notes:
Average monthly salary for 10 months, prior to retirement:
Salary of 6 months 16 days: (1st April 2007 to 16th October 2008) = 98,000
Salary of 3 months 14 days: (14th December 2006 to 31st March 2007) = 41,600
Total Basic Salary 1,39,600
Add: Dearness allowance
For 6 months 16 days: (1st April 2007 to 16th October 2008) = 49,000
For 3 months 14 days: (14th December 2006 to 31st March 2007)= 20,800
Total D.A. 69,800
D.A. [40% of 69,800, forming part of retirement benefits] 27,920
Total salary of 10 months 1,67,520
Average Salary = 1,67,520 / 10 = 16,752
Taxable amount of Leave Encashment:
Amount of encashment received:
(30 x 20) – (150 +60) x (15,000 + 7,500)/ 30 = 2,92,500
Less: Exempted u/s 10(10AA) [Least of the followings]
(i) Actual amount received 2,92,500
(ii) 10 months salary(preceeding the month
of retirement) 1,67,520
(iii) Leave credit on the date of retirement
[ (30 x 20) – (150 + 60) x (16,752 / 30)] 2,17,776
(iv) Maximum Limit 3,00,000 1,67,520
Taxable amount of Leave encashment 1,24,980
P12. Ms. Parineeta retired from service after 28 years from ABC Ltd. Leave sanctioned by
employer 45 days p.a. Leave availed during service 400 days. Leave encashment received:
Rs. 4,30,000. Average salary for 10 months preceeding the month of retirement
Rs.15,000.Compute taxable amount of Leave encashment for the Previous year 2007-08.
Computation: Since leave sanctioned by the employer is more than 30days p.a., the
following calculation is required, to determine the amount of leave credit on the date of
retirement.
Particulars
(i) Leave credit available on the date of retirement
= Total Leave sanctioned during tenure of employment – Total leave
availed during service
= [( 28 x 45) – 400]
Less: Excess leave sanctioned by the employer
[(45– 30 days) per year x 28)
Leave credit on the basis of 30 days credit for completed years of
service
860
420
440
(ii) Leave salary on the basis of 30 days credit = Step (i) x Average
Salary= 440 x (15,000/30)
2,20,000
Taxable Leave Salary on Retirement
Particulars Rs Rs
Amount Received on Leave Encashment 4,30,000
Less: Exemption u/s 10(10AA) Least of the
followings:
(i)Actual amount of Leave encashment received
(ii)Average salary of the individual for the past
10 months x 10 months
(iii)Maximum Limit
(iv) Leave at credit at the rate of 30 days p.a. for
every Completed year of service as calculated in
Step (ii)
4,30,000
1,50,000
3,00,000
2,2,000
1,50,000
Taxable Value of Leave Encashment 2,80,000
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RETRENCHMENT COMPENSATION
P13. Mr.Clever was retrenched from service of UGLY Ltd. The scheme of retrenchment is
approved by the Central Government. Retrenchment compensation received Rs.8 lakhs.
What is the taxability?
Answer: When retrenchment compensation is received in accordance with any scheme,
which is approved by the Central Government, it is fully exempted from tax.
P14. Mr.Flemming was retrenched from service of “GO SLOW Ltd”. Retrenchment
compensation received Rs.6,00,000. Amount determined under the Industrial Disputes
Act,1947 Rs.4,75,000. What is the taxability?
Computation of Taxable Retrenchment Compensation
Particulars Rs Rs
Amount received as Retrenchment Compensation 6,00,000
Less: Exemption u/s 10(10B): Least of the
followings:
(i)Actual amount received
(ii)Amount determined under the Industrial
Disputes Act,1947
(iii)Maximum Limit
6,00,000
4,75,000
5,00,000
4,75,000
Taxable Value 1,25,000
VOLUNTARY RETIREMENT COMPENSATION
P15. Mr.Hitesh, after serving Z Ltd. for 23 years 7 months, opted the Voluntary
Retirement Scheme. Total tenure of service:30 years Compensation received Rs.8,00,000.
Last drawn Salary (i.e. Basic pay + D.A, forming part of retirement benefits) Rs.15,000.
Computation of Exemption:
Total tenure of service = 30 x 12=360 months
Actual length of service = 23 years 7 months = 283 months
No.of months of service left= (360 – 283) months = 77 months
Taxable VRS compensation
Particulars Rs Rs
Amount received as VRS Compensation 8,00,000
Less: Exemption u/s 10(10C): Least of the
followings:
(i)Actual amount received
(ii)Maximum Limit
(iii) The highest of the following:
• Last drawn salary x 3 x No.of fully
completed years of service
=15,000 x 3 x 23= 10,35,000
• Last drawn salary x Balance of no.of
months of service left.
= 15,000 x 77 months= 11,55,000
8,00,000
5,00,000
11,55,000
5,00,000
Taxable Value 3,00,000
DEDUCTIONS AGAINST SALARY
P16. Ms.Neha is a Senior Accountant in the Ministry of Defence,Govt. of India. She
received entertainment allowance Rs.5,000 p.m. Her basic salary is Rs.35,000 p.m.
Professional tax paid Rs.5,000. Compute Income from Salary.
Computation of Income from Salary
Rs.
Basic Salary : 35,000 x 12 = 4,20,000
Entertainment Allowance: 5,000 x 12 = 60,000
Gross Income from Salary 4,80,000
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Less: Deduction u/s 16(ii): Entertainment allowance:
Least of the following will be allowed as a deduction:
(i) Actual amount of
entertainment allowance received 60,000
(ii) 20% of Basic salary of the Individual
[ 20% of 4,20,000] 84,000
(iii) Statutory limit: 5,000
Exempted amount being the least 5,000
Less: Professional Tax paid u/s 16(iii) 5,000
Income from Salary 4,70,000
VALUATION OF PERQUISITE FOR MEDICAL TREATMENT
P17. Calculate the perquisite value of the expenditure on medical treatment, which is
assessable in the hands of an employee of a company, inclusive of the conditions to be
satisfied:
Gross total income, inclusive of salary Rs.2,00,000
(a) amount spent on treatment of the employee’s wife in a hospital maintained by the
employer Rs.20,000
(b) amount paid by the employer on treatment of the employee’s child in a hospital
Rs.14,000
(c) medical insurance premium reimbursed by the employer on a policy covering the
employee, his wife and dependent parents Rs.7,000
(d) (i) amount spent on medical treatment of the employee outside India Rs.2,50,000
(ii) amount spent on travel and stay abroad Rs.90,000
(e) amount spent on travel and stay abroad of attendant Rs.60,000
Nature of Perquisites Amount
Taxable
Taxability/Non-taxability
Treatment of employee’s wife in
a hospital
Maintained by employers
Nil Fully exempted
Reimbursement of expenses
incurred on treatment of
employee’s child in hospital
Nil Not taxable: since the amount is less than
Rs.15,000
Reimbursement of medical
insurance premium paid
Nil Not taxable: since medical insurance
premium referred to u/s 80D is paid on the
employee and members of his family
Medical treatment outside India Nil It is assumed that the whole of such
expenditure is permitted by RBI
Amount spent on travel and
stay abroad for the employee
( herein referred as the patient)
Nil Not taxable: as the Gross total income
does not exceed Rs.2,00,000
Amount spent on travel and
stay abroad of the attendant
Nil Not taxable: as the Gross total income
does not exceed Rs.2,00,000
PERQUISITE VALUATION OF ACCOMODATION FACILITIES
P18. Mr.Goutam is a Central Govt.employee. He is provided with an accommodation. The
Licence fee determined by the Government is Rs.500 p.m. An amount of Rs.50 is deducted
from his salary towards such rent. Determine the taxable value of perquisite.
Taxable Value of Unfurnished Accommodation: Explanation 1 to Sec.17(2) Rule 3(1)
Licence fee determined by the Government (500 x 12) = 6,000
Less: Rent recovered from employee (50 x 12) = 600
Taxable value of perquisite = 5,400
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P19. R submits the following information regarding his salary income for the year 2006-
07: Basic salary Rs.15,000p.m.; D.A(forming part of salary) 40% of basic salary;City
Compensatory Allowance Rs.300p.m.; Children Education Allowance Rs.400 pm per child
for 3 children; Transport Allowance Rs.1,000 p.m. He is provided with a rent free
unfurnished accommodation which is owned by the employer. The fair rental value of the
house is Rs.24,000 p.a. Compute the gross salary assuming accommodation is provided in
a city where population is (a) exceeding 25 lakhs (b) exceeding 10 lakhs but not
exceeding 25 lakhs (c) less than 10 lakhs
Computation of Income from Salary
Particulars Amount Amount
Basic salary 15,000 x 12
D.A. (40% of 1,80,000)
City Compensatory Allowance (fully taxable) (300 x 12)
Children Education Allowance
Actual amount received (400 x 12 x 3)
Less: Exemption u/s 10(14)
@ Rs.100 per month per child subject to a maximum of 2
children
(100 x 12 x 2)
Transport Allowance
Actual amount received ( 1,000 x 12)
Less: Exemption u/s 10(14) @ Rs.800 p.m. (800 x 12)
14,400
2,400
12,000
9,600
1,80,000
72,000
3,600
12,000
2,400
Gross Income from Salary u/s 17(1)
Add: Value of Unfurnished accommodation u/s 17(2) rule
3(1) explanation 1
Case (a) Population exceeding 25 lakhs
15% of salary
Salary = Basic pay + DA( forming part of retirement
benefits) + all other taxable allowances
= 1,80,000 + 72,000 + 3,600 + 12,000 + 2,400
= 2,70,000
Total Income from Salary
2,70,000
40,500
3,10,500
Note: Case (b): where population is exceeding 10 lakhs but not exceeding 25 lakhs
10% of Salary shall be considered as the value of taxable perquisite
= 10% of Rs.2,70,000 = Rs.27,000
Case (c) : where population is less than 10 lakhs
7.5 % of salary shall be considered as the value of taxable perquisite
= 7.5% of Rs.2,70,000 = Rs.20,250
P20. Mr. Mohan submits the following information regarding his salary income which he
gets from ABC Ltd. Basic salary Rs.15,000 pm; D.A. 40% of basic salary( forming part of
retirement benefits);City Compensatory Allowance Rs.300pm; Children Education
Allowance Rs.400pm( for 3 children); Transport allowance Rs.1,000 p.m.;Reimbursement
of Medical Expenses Rs.25,000. He is also entitled to HRA of Rs.6,000 p.m. from 1.4.2007
to 31.8.2007. He was paying a rent of Rs.7,000 p.m. for a house in Delhi. From 1.9.2007
he was provided with an accommodation by the company for which the company was
paying the rent of Rs.5,000 pm. The company charged him Rs.1,000 pm as rent for the
accommodation. Compute gross salary for the a.y.2008-09.
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Computation of Income from Salary
Particulars Amount Amount
Basic salary 15,000 x 12
D.A. (40% of 1,80,000)
City Compensatory Allowance (fully taxable) (300 x 12)
House Rent Allowance (April to August 2007)
Actual amount received ( 6,000 x 5)
Less: Exemption u/s 10(13A) Rule 2A
Least of the followings:
(a) Actual amount received 30,000
(b) 50% of salary 52,500
(c) Rent paid – 10% of Salary
[ 7,000 x 5 – 10% of 1,05,000] 24,500
Note: Salary for HRA (5 months)
Basic salary : 15,000 x 5 = 75,000
D.A. = 40% of 75,000 = 30,000
Total 1,05,000
Children Education Allowance
Actual amount received (400 x 12 x 3)
Less: Exemption u/s 10(14)
@ Rs.100 per month per child subject to a maximum of 2
children
(100 x 12 x 2)
Transport Allowance
Actual amount received ( 1,000 x 12)
Less: Exemption u/s 10(14) @ Rs.800 p.m. (800 x 12)
30,000
24,500
14,400
2,400
12,000
9,600
1,80,000
72,000
3,600
5,500
12,000
2,400
Gross Income from Salary u/s 17(1)
Add: Value of Unfurnished accommodation u/s 17(2) rule
3(1) explanation 1
Assuming Population exceeding 25 lakhs ( as
accommodation provided in a Metro city)
15% of salary for 7 months( September 2007 to March
2008)
Salary = Basic pay + DA( forming part of retirement
benefits) + all other taxable allowances
= [(15,000 x 7) + (40% of 1,05,000) + (300 x 9)+
{(400 x 9 x 3) – (100 x 9 x 2)}+ {(1000 – 800) x 9}]
= 1,60,500
Total Income from Salary
2,75,500
24,075
2,99,575
P21. Mr.Sambhu was provided an accommodation in a hotel by his employer for 22 days
before providing him a rent free accommodation which is owned by the employer. The
hotel charges paid Rs.6,000. Salary for the purpose of accommodation for the period of 22
days is Rs.11,000. Compute the value of accommodation.
Computation:
In case of accommodation provided to the assessee on account of transfer, which is
exceeding 15 days cumulatively, such shall be taxable as a perquisite. The company
recovered Rs.1,000 from the employee. Compute taxability.
Lower of the following:
(i) 24% of salary paid/payable= 24% of 11,000 = 2,640
(ii) Actual charges paid/payable = 6,000 2,640
Less Amount paid or payable by the employee 1,000
Taxable value of perquisite 1,640
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P22. Value of unfurnished accommodation (computed) Rs.50,000. Cost of furniture
provided by the employer Rs.80,000. Hire charges of furniture provided in the
accommodation Rs.500 p.m. Amount recovered from employee Rs.200 p.m. Compute
taxability.
Computation: Value of Furnished Accomodation ( provided at Concessional rates)
Particulars Rs.
Value of unfurnished accommodation as above
Add: Value of Furniture provided:
• 10%p.a. of original cost of such furniture
• If hired from third party, then Actual hire charges
Less: Any charges paid or payable by the employee (200 x 12)
50,000
8,000
6,000
(2,400)
Value of Furnished Accomodation 61,600
P23. Mr.Ritesh is provided with an accommodation in Kolkata since April 2007. Salary
Rs.40,000 p.m. Cost of furniture provided Rs.80,000 On 1st September,2007, following a
promotion with a increase in Salary by Rs.15,000,he was transferred to Jharkhand
(population less than 25 lakhs but more than 10 lakhs),and was also provided an
accommodation there. Mr.Ritesh was allowed to retain the Kolkata accommodation till
March,2008. Compute taxability.
Computation:
Phase 1: Value of Furnished Accommodation (Kolkata) (April to September 2007)
Particulars Rs.
Value of unfurnished accommodation (15% of 40,000 x 6 months)
Add: Value of Furniture provided:
• 10%p.a. of original cost of such furniture
(10% of 80,000 x 6 months)
36,000
8,000
Value of Furnished Accommodation 44,000
Phase 2: Valuation of accommodation (October 2007 to December 2007)
(a) For the first 90 days of transfer: Where accommodation is provided both at existing
place of work and in new place, the accommodation, which has lower value, shall be
taxable.
(b) After 90 days: Both accommodations shall be taxable.
Computation for the first 90 days of transfer: (October 2007 to December 2007)
Lower of:
(i) Value of accommodation at existing place of work
(ii) Value of accommodation at new place
Value of accommodation at existing place of work (Kolkata)
15% of salary for 3 months (i.e. 90 days) = 15% of 55,000 x 3 months=24,750
Add: Cost of furniture provided: 10% of 80,000 x 3 months =24,000
Total Value of Perquisite 48,750
Value of accommodation at new work place(Jharkhand)
10% of salary for 3 months (i.e. 90 days) = 10% of 55,000 x 3 months = 16,500
Therefore, the assessee shall be assessed to tax on Rs.16,500 (being the lower)
Phase 3: Valuation of accommodation (after 90 days) (January 2008 to March
2008)
For Kolkata accommodation: 15% of 55,000 x 3 months = Rs.24,750
Add: Cost of furniture provided: 10% x 80,000 x 3 months = Rs.24,000
Total value of perquisite Rs.48,750
For Jharkhand accommodation: 10% of 55,000 x 3 months = Rs.16,500
Total value of perquisite:
Particulars Taxable value of
perquisite
Phase 1: Accomodation in Kolkata 44,000
Phase 2: Accomodation in Jharkhand (being the lower during 90
days)
16,500
Phase 3: Accomodation in Kolkata 48,750
16,500
Total Value of Taxable Perquisite 1,25,750
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OTHER FACILITIES AND PERQUISITES TO EMPLOYEE AND HIS HOUSEHOLD
P24. Mr.E is employed with N Ltd. he also gets the services of sweeper and watchman.
Determine his gross salary in the following cases:
1) His salary is Rs.4,200 pm. Employer provides the services of sweeper and
watchman. He pays them Rs.600 pm and Rs.500pm;
2) His salary is Rs.4,200 pm. Sweeper and watchman are engaged by N at the rates
given in clause(1) above but their wages are reimbursed by the employer;
3) His salary is Rs.4,210 pm. Employer provides the services of sweeper and
watchman at the above rates but he recovers from N Rs.200 pm and Rs.300 pm
respectively.
E has paid employment tax of Rs.400.
Computation:
Particulars Case (1) Case (2)
[Ref.Sec.17(2)(iv),
Rule 3(3)]
Case (3)
[Ref.Sec.17(2)(iii)
Rule 3(3)]
Salary 50,400 50,400 50,520
Wages of sweeper Sec.17(2)(iii) not
taxable
7,200 4,800
Wages of watchman Sec.17(2)(iii) not
taxable
6,000 2,400
Gross salary 50,400 63,600 57,720
Working Note:
Case (1): He is a non-specified employee. Perquisites provided by employer u/s 17(2)(iii)
are not chargeable to tax:
Salary: 4,200 x 12 = 50,400
Less: Professional tax paid u/s 16(iii) = 400
Monetary income not exceeding Rs.50,000 = 50,000
Case (2): If the facility is engaged by the employee but reimbursed by the employer, it is
an obligation of employee, discharged by employer u/s 17(2)(iv), it is always taxable.
Case (3): He is a specified employee, as his monetary income, chargeable under the head
“salaries” exceeds Rs.50,000.
Gross salary; 4,210 x 12 = 50,520
Less: Professional tax paid u/s 16(iii) = 400
Monetary income exceeding Rs.50,000 Rs.50,120
P25. G Ltd. provides electricity to its employee, P. Annual consumption as per meter
reading comes to 2,250 units. Determine the value of the perquisite in the following cases:
1) Electricity meter is in the name of P and the rate of electricity is Rs.3 per unit
2) Electricity meter is in the name of G Ltd. the rate of electricity is Rs.3 per unit.
3) G Ltd. is a power-generating company. Manufacturing cost is 90 paise per unit but
supplied to public @ Rs.2 per unit. However, it charges 30 paise per unit from
employees.
Solution: With reference to Rule 3(4)
1) Perquisite value of free electricity is Rs.6,750 (2,250 x 3 ). As the electric meter is
in the name of the employee, it is his obligation to pay the bill. However, as the bill
has been paid by the employer, it is an obligation of employee, discharged by the
employer. It is always taxable u/s 17(2)(iv).
2) Perquisite value of free electricity will be Rs.6,750. It shall be assessed to tax, if
the employee is a specified employee as per Sec.17(2)(iii)
3) Perquisite value of electricity supplied = 2,250 ( 0.90 – 0.30) = Rs.1,350
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P26. Determine the value of education facility in the following cases:
1) Three children of G, an employee of S Ltd., are studying in a school, run by S Ltd.
School fees is Rs.2,500 pm and hostel fees is Rs.2,000 pm. But the employer
recovers only Rs.600 pm and Rs.500 pm respectively. However, a similar school or
a hostel around the locality charges Rs.1,800 pm and Rs.1,200 pm respectively.
2) The employer has also reimbursed the school fees of Rs.1,200 pm of his nephew,
fully dependent on him after the death of his brother.
Computation of taxable value of education facility [As per Rule 3(5)]
Particulars Taxable value of
perquisite
1)(a) School fees of his children, studying in a school run by employer:
(Rs.1,800 x 3 x 12) – (1,000 x 3 x 12) – (600 x 3 x 12)
(b) Hostel fees: (2,000 x 3 x 12) – (500 x 3 x 12)
7,200
54,000
2) School fee of nephew (1,200 x 12) 14,400
Total value of taxable perquisite 75,600
P27. Mr. Z is the manager of F Ltd. his son is a student of Amity International School.
School fees of Rs.4,000 pm and hostel fees of Rs.3,000 pm., are directly paid by Z Ltd. to
the school but it recovers from Z only 30%. F also joins an advanced course of Marketing
Management for 4 months at IIM, Ahmedabad, fees of the course, Rs.2,50,000 is paid by F
Ltd. Determine the perquisite value of the education facility.
Computation:
Computation of taxable value of education facility [As per Rule 3(5)]
Particulars Taxable value of
perquisite(Rs.)
1)(a) School fees of his children, studying in a school run by employer:
(Rs.4,000 x 12) - (1,200 x 12)
(b) Hostel fees: (3,000 x 12) – (900 x 12)
33,600
25,200
2) Fees paid for Marketing Management course for Mr.Z ( it is a fully
exempted perquisite)
Nil
Total value of taxable perquisite 58,800
P28. Mr.D takes interest-free loan of Rs.2,50,000 on 1.11.07 from his employer to
construct his house. The loan is repayable in 50 monthly installments from January 2007.
Compute the value of interest free loan. SBI Lending rate 8.5% p.a. (for housing loans not
exceeding 5 years).
Computation of taxable value of Loan provided by employer [As per Rule 3(7)(i)]
Time period during which loan remains outstanding Balance on the
last day of the
month
November 2,50,000
December 2,50,000
January 2,45,000
February 2,40,000
March 2,35,000
Total
Perquisite value of interest-free loan:
12,20,000 x 8.5% x 1/12 = Rs.8,642
12,20,000
P29. Mr.Prabir Nandy is a Manager in H Ltd. He gets salary @ Rs.30,000 pm. He is also
allowed free use of computer, video-camera and television of the company. H Ltd. has
purchased (i) Computer for Rs.1,00,000 (ii) Video-camera for Rs.30,000. Their written
down value on 1.4.07 is Rs.60,000 and Rs.30,000 respectively. Television set has been
taken on lease rent @ Rs.100 pm. The employer recovers Rs.500 per month for use of the
assets. Compute his gross salary for the assessment year 2008-09.
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Computation of taxable value of Loan provided by employer [As per Rule
3(7)(vii)]
Salary : 30,000 x 12
Add: Free use of computer, u/s 17(2)(vi) read with Rule 3(7)(vii)
Add: Free use of video camera, u/s 17(2)(vi) read with rule
3(7)(vii) [ 10% of 30,000]
Add: Free use of telephone, u/s 17(2)(vi) read with rule 3(7)(vii)
(100 x 12)
3,60,000
Nil
3,000
1,200
Gross Salary 3,64,200
P30. Mr.C is an accountant of D Ltd. He gets salary of Rs.25,000 pm. He has purchased
motor car and washing machine from the company on 1 February 2008. Particulars of cost
and sale price of the two assets are given below:
Year of Purchase Particulars of the
Asset
Purchase Price(Rs) Sale price(Rs)
01.07.2004 Motor car 2,50,000 85,000
15.09.2003 Washing Machine 10,000 5,000
Compute the taxable value of perquisites for the assessment year 2008-09
Computation of taxable value of perquisites on transfer of moveable assets
[As per Rule 3(7)(viii)]
TRANSFER OF MOVABLE ASSET TO EMPLOYEES
Nature of Assets transferred Amount
Motor car (Actual Cost)
Less: Depreciation @ 20% on WDV from 01.07.2004 to 30.06.2005
WDV
Less: Depreciation @ 20% on WDV from 01.07.2005 to 30.06.2006
WDV
Less: Depreciation @ 20% on WDV from 01.07.2006 to 30.06.2007
WDV
2,50,000
50,000
2,00,000
40,000
1,60,000
32,000
1,28,000
Washing Machine (Actual Cost)
Less: Depreciation @ 10% on SLM from 15.09.2003 to 14.09.2004
WDV
Less: Depreciation @ 10% on WDV from 15.09.2004 to 14.09.2005
WDV
Less: Depreciation @ 10% on WDV from 15.09.2005 to 14.09.2006
WDV
Less: Depreciation @ 10% on WDV from 15.09.2006 to 14.09.2007
WDV
10,000
1,000
9,000
1,000
8,000
1,000
7,000
1,000
6,000
Particulars Motor Car Washing Machine
WDV on the Asset 1,28,000 6,000
Less: Amount recovered
from employee
85,000 5,000
Taxable value of
perquisite
43,000 1,000
TREATMENT OF TAX ON NON-MONETARY BENEFITS PAID BY EMPLOYER
1. Payment of tax by employer on non-monetary perquisites:
(a) U/s 192(1A), the employer may, at his option, pay income tax on the whole or part
of perquisite provided by way of non-monetary payments.
(b) Such payment of tax is not taxable as a perquisite in the hands of the employee
[Sec.10 (10CC)]
(c) The payment of income tax in such case is not allowable as expenditure in the hands
of the employer. [Sec. 40(a)(v)]
(d) Such tax shall be determined at the average rate of income tax computed on the
basis of the rates in force for the financial year, on the income chargeable under the head
“Salaries” including non-monetary payments. The tax so payable shall be construed as if it
were, a tax deductible at source, from income under the head “Salaries” and shall be
subject to the provisions of Chapter XVII [COLLECTION AND RECOVERY OF TAX].
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2. Determination of tax payable by employer u/s 192(1B) i.e. Tax on Non-monetary
benefits:
Step 1: Average Rate of Income Tax =
Tax on Income under “Salaries” (including non-monetary benefits) x 100
Income under the head Salaries
Step 2: Tax payable on Non-monetary benefits=
Average Rate of Income Tax (Step 1) x Value of Non-monetary benefits
P31. Income from Salary Rs.5,00,000(including perquisites). Income Tax 99,000. Income
from salary Rs.3,80,000 (excluding perquisites). Determine the tax payable by employer
u/s 192(1B) on non-monetary benefits.
Computation of Tax on Non-monetary Benefits:
Step 1: Average Rate of Income Tax = 99,000 x 100 = 19.8%
5,00,000
Step 2: Tax payable on Non-monetary benefits= 19.8% x 1,20,000 = 23,760
TAXABILITY OF PERQUISITES PROVIDED BY EMPLOYERS WHO ARE SUBJECT TO
FBT (FRINGE BENEFIT TAX)
Taxability of other perquisites provided to employee or his household members by an
Employer who is not liable to pay FBT [Rule 3]
Taxability of Motor Car Benefits [Rule 3(2)(A)]
Owner of Car Expenses
borne by
Purpose Taxable Value of Perquisite
1(a) Employer Employer Fully
official
Not a perquisite provided the
documents as specified in Rule
3(2)(B) are maintained.
1(b) Employer Employer Fully
private
Total of:
(i) Actual expenditure on car
(ii) Remuneration to chauffeur
(iii) 10% of the cost of car (normal
wear & tear)
Less: Amount charged from
employee
1(c)(i) Employer Employer Partly
official
and partly
personal
Cubic Capacity of Car Engine
upto 1.6 litres
Rs.1,200 p.m+ Rs.600 p.m. for
chauffeur
Cubic Capacity of Car Engine
above 1.6 litres
Rs.1,600 p.m. + Rs.600 p.m. for
chauffeur
1(c)(ii) Employer Employee Partly for
official
and partly
for
personal
Cubic Capacity of Car Engine
upto 1.6 litres
Rs.400 p.m+ Rs.600 p.m. for
chauffeur
Cubic Capacity of Car Engine
above 1.6 litres
Rs.600 p.m. + Rs.600 p.m. for
chauffeur
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2(i) Employee Employer Fully
official
use
Not a perquisite provided the
documents as specified in Rule
3(2)(B) are maintained.
2(ii) Employee Employer Partly
official
and partly
personal
Subject to Rule 3(2)(B)
Actual expenditure incurred
Less: Car cubic capacity upto 1.6
litres [i.e. value as per 1(c)(i)]
OR
Car cubic capacity upto 1.6 litres
above 1.6 litres [ i.e. value as per
1(c )(i)
3(i) Employee owns other
auto-motive but not car
Employer Fully
official
use
Not a perquisite provided the
documents as specified in Rule
3(2)(B) are maintained.
3(ii) Employee owns
other auto-motive but not
car
Employer Partly for
official
and partly
for
personal
Subject to Rule 3(2)(B)
Actual expenditure incurred by
employer
Less: Rs.600 p.m.
Note:
1. Using cars from pool of cars owned or hired by Employer:
The employee is permitted to use any or all cars for both official and personal use:
For one car Valued as per 1(c )(i)
For more than one car Valued as per 1(b) as if fully used for personal purpose
2. Documents to be maintained for claiming ‘not taxable perquisite’ or higher deduction
wherever applicable [Rule 3(2)(B)]
(a) Employer should maintain complete details of journey undertaken for official purpose,
which includes date of journey, destination, mileage and amount of expenditure incurred
thereon.
(b) Certificate of supervising authority of the employee, wherever applicable, to the effect
that the expenditure incurred for wholly and exclusively for performance of official duties,
should be provided.
TAXABILITY OF OTHER BENEFITS
Rule Nature of Perquisite Taxable Value of
Perquisite(TVP)
3(6) Transportation of goods or passengers
at free or concessional rate provided
by the employer engaged in that
business (other than railways/airlines)
Value at which offered to public
Less: amount recovered from the
employee
3(7)(ii) Traveling, touring, accommodation and
other expenses met by the employer
other than specified in Rule 2B. (this
shall be calculated only for the period
of vacation)
Amount recovered by employer or
Value at which offered to public
Less: amount recovered from the
employee
3(7)(iii) Free meals during office hours
Free meal in remote area or offshore
installation area is not a taxable
perquisite
Actual cost to the employer in
excess of Rs.50 per meal or tea or
snacks
Less: amount recovered from the
employee.
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Tea or non-alcoholic beverages and
snacks during working hours is not
taxable.
3(7)(iv) Value of any gift or voucher or taken
other than gifts made in cash or
convertible into money (e.g. gift
cheques) on ceremonial occasion
Value of gift
In case the aggregate value of gift
during the previous year is less
than Rs.5,000, then it is not a
taxable perquisite
3(7)(v) Expenditure incurred on credit card or
add on card including membership fee
and annual fee
Actual expenditure to employer is
taxable
Less: amount recovered from
employee
If it is incurred for official purpose
and supported by necessary
documents then it is not taxable.
3(7)(vi) Expenditure on club other than health
club or sports club or similar facilities
provided uniformly to all employees
Actual expenditure incurred by the
employer
Less: amount recovered from
employee
If the expenditure is incurred
exclusively for official purposes and
supported by necessary documents
then it is not taxable.
Initial fee of corporate membership
of a club is not a taxable perquisite
3(7)(ix) Any other benefit or amenities or
service or right or privilege provided
by the employer other than telephone
or mobile phone
Cost to the employer
Less: amount recovered from
employee
Note: Members of household includes: spouse(s), children and their spouses, parents,
servants and dependents.
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PROVIDENT FUNDS
Particulars Statutory Recognized Unrecognized Public
Constituted
under
Provident
Funds
Act,1952
EPF and Misc,
Provisions
Act,1952 &
recognized by the
Commissioner of
PF and CIT
Not recognized by
the Commissioner of
Income Tax
Public
Provident
Fund
Act,1968
Account in
SBI or Post
Offices
Contribution
by
Employer
and
Employee
Employer and
Employee
Employer and
Employee
All assessees
independently
Assessee’s
Contribution
Deduction
u/s 80C
Deduction u/s
80C
No Income Tax
Benefit
Deduction
u/s 80C
Employer’s
Contribution
Not taxable Amount exceeding
12% of salary is
taxable
Not taxable at the
time of contribution
Not
applicable
Interest
credited
Fully
exempted
Exempted upto
9.5% p.a. Any
excess is taxable
On Employee’s
contribution
taxable under the
head “Other
Sources”
On Employer’s
contribution not
taxable at the time
of credit
Fully exempt
Withdrawal at
the time of
retirement
/resignation
/termination,
etc
Exempted
u/s
10(11)
Exempted u/s
10(12)
Subject to
conditions
Employee’s
contribution and
interest thereon is
not taxable.
Employer’s
contribution and
interest thereon is
taxable as Profits in
lieu of Salary, under
“ Salaries”
Exempted
u/s 10(11)
Note: Sum received by an Employee under approved Superannuation Fund is also exempt
from tax u/s 10(13).
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