Income under head salaries

RELEVANCE 5%
DEVOTION 3 HOURS
3INCOME
UNDER
THE HEAD
SALARIES
HISTORICAL RELEVANCE
14
12
10
8
6
4
2
0
May Nov May Nov May Nov May Nov May Nov May 07 07 08 08 09 09 10 10 11 11 12
Marks

Income under the Head Salaries
Sectionwise Overview:
Section Particulars Page No.
17(1) Definition of Salary 43
15 Charging section 43
Allowances 45
10(13A) House Rent Allowance 45
10(14) Notified/Specific Allowances 47
16(ii) Enter tainment allowance 49
10(6)/(7) Allowances exempt in the case of cer tain persons 50
Fully taxable allowances 51
Perquisites 52
17 Taxable in the hands of all employees 53
Taxable only for specific employees 53
Tax free perquisites 56
Valuation of perquisites 57
Rule 3 Accommodation provided by the employer 58
Fringe Benefits 63
Medical expenses 73
10(5) Leave Travel concession 77
Life Insurance/Deferred Annuity premium 79
Employee Stock Option Plan 79
17(3) Profits in lieu of salary 81
Retirement Benefits 82
10(10) Gratuity 82
10(10A) Pension 85
10(10AA) Leave Salary 86
10(10B) Retrenchment Compensation 89
10(10C) VRS Compensation 90
10(11) Contribution to Provident Fund 92
16 Deductions 93
89 read with Relief 95
Rule 21A(3)

INCOME from salaries is one of the simplest heads of taxation. The entire chapter is contained
in Sec 15-17 together with relevant rules and exemptions.
3.1 Basics
3.1.1 Definition of the term Salary - Sec 17(1): Salary includes –
• Wages
• Annuity or pension
• Gratuity
• Any fees,commissions or perquisites
• Profits in lieu of or in addition to salary
• Advance salary
• Encashment of unavailed leave
• Interest earned in excess of 9.5% on the balance with a Recognised Provident Fund
(W.r.e.f. 01.09.2010 vide Notification No.24/2011 dated 13.05.2011)
• Amount transferred in excess of 12% of salary to Recognised Provident Fund
• Profits in lieu of salary
• Contribution by Central Government to the account of an employee towards a Pension
scheme notified u/s 80CCD.
3.1.2 Charging Section- 15
The following incomes shall be charged to Income Tax under the head “Salaries”
• Any salary due from an employer or a former employer 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, before it became due.
• Any arrears of salary paid or allowed in the previous year by or on behalf of an employer or
former employer, if not charged to tax in any earlier year.
Inference:
• Salary is charged to tax on due or receipt basis whicheveris earlier
• Existence of an Employer-Employee relationship is a principal requirement for income to be
considered as Salary
• Where salary is received from more than one employer- salary from all employers are taxable
• Salary from former, present or a prospective employer is charged to taxation.
• Salary foregone shall be treated as application of income and charged to taxation
on due or receipt basis whichever is earlier.
• Employee‟s salary income shallinclude the value ofincome taxpaid by the employer.
• Any voluntary payment made by the employer shall form par t of salary income.

• Salary and wages are not different for taxation purposes.
• Advance salary is taxable on receipt while advance against salary is not salary income as it is
in the nature of a loan from employer.
• Tax Free Salary: Where an employer bears the tax liability of an employee, the employee has
to include the taxpaid by the employer as par t of the total salary income. For example, if Mr X
has negotiated a salary of Rs 60 lacs per annumnet of tax, with his employer and his employer
has paid a total tax of Rs 15 lacs for and on behalf of Mr X, the total salary income of Mr X
shall be Rs 75 lacs and not Rs 60 lacs.
• However tax on non monetary perquisites paid by the employer is exempt u/s. 10(10CC).
Tax paid by employer on salary of employee is exempt u/s 10(10CC) - DIT vs Sedco Forex
International Drilling Inc [2012] 25 taxmann.com 238 (Uttarakhand)
• Salary to a partner: Salary paid to a par tner of a firm is chargeable to tax u/s 28(v) i.e Profits
and gains of business or profession since there is no employer – employee relationship between
the firm and the par tner.
• Salary taxed on due basis shall not be taxed again on receipt and vice-versa
• Section 15 is not attracted in respect of remuneration received by an MLA, when provisions of
section 15 are not attracted to remuneration received by him, section 17 cannot be attracted, in
respect of reimbursement of medical expenses, as section 17 only extends definition of „salary‟
, by providing cer tain items mentioned therein, to be included in salary - [2008] 306 ITR 126
(RAJ.)CIT vs Shiv Charan Mathur. However in the case of Lalu Prasad vs CIT (2009) 316
ITR 186 (Patna) it was held that pay and allowances received by the Chief Minister of State or
a Minister is salary. It cannot be taxed under the head income from other sources.
• Surrender of Salary : Any surrender ofsalary by an employee to theCentralGovernment u/s 2of
the Voluntary Surrender of Salaries (Exemption from Taxation) Act 1961 would be excluded
from the total income of the employee.This benefit is available for both Government and
Non Government employees.
• Where the managing director is forced to refund a par t of his salary since it was in excess of the limits
prescribed by the Companies Act 1956 – the same could not be held to be the assessee‟s income and
therefore was not assessable to taxation – CIT vs Raghunath Murti (2009) 178 (Taxman) 144.
3.1.3 Place of Accrual- Sec 9(1)
• Salary will be deemed to accrue or arise at the place where services are rendered.
• If services are rendered in India but salary is received abroad, then income is deemed to
accrue or arise in India.
• If a person, after having served in India, settles abroad and receives pension abroad, such
pension income shall be deemed to accrue or arise in India.
• Leave salary paid abroad in respect of leave earned in India is deemed to accrue or arise in India.
Exception: In the case of a Government employee, who is a citizen of India and renders
service outside India, salary received shall be treated as income deemed to accrue or arise in
India although services are rendered outside India.
Example: Indian citizen working for Indian embassy at Dubai.

Study of the various provisions in computation of income under the head Salaries can be
broadly classified as:
- Allowances
- Perquisites
- Valuation of perquisites
- Retirement benefits
- Deductions
3.2 Allowances
Allowances are monetary receipts from the employer towards meeting specific expenses-
personal or official in nature. Allowances are of different types and are generally need and
occupation based. Allowances are taxable components of salary income unless they are
specifically provided as a deduction or exemption under the provisions of the Act.
Allowances can be broadly classified as under:
• House Rent Allowance: Sec 10(13A)
• Notified/Specified allowances: Sec 10(14)
• Entertainment allowance allowed as a deduction u/s 16(ii)
• Allowances exempt in the case of certain persons
• Fully taxable allowances.
3.2.1 House Rent Allowance (HRA)- Sec 10(13A) read with Rule 2A
House rent allowance is provided to an employee to meet the cost of rental accommodation.
Exemption under this section shall be the least of the following:
• Actual HRA for the relevant period
• Rent paid (-) 10% of Salary
• 50% of Salary for the relevant period where accommodation is in a metro city and 40% of
salary for Rest of India
• Relevant period means the period during which the rented accommodation was
occupied by the assessee during the previous year.
Salary= Basic + Dearness Allowance (DA) forming part of salary forretirement benefits
+ Commission as a % of turnover
• Salary is taken on due basis for the period during which the rented accommodation is occupied
by the employee.
• Salary of any other period is not to be included even though it may be received and taxed
during the previous year.
• Where the employee stays in his own accommodation or does not incur any expenditure towards
accommodation, the entire HRA received shall be taxable.
• Metro for this purpose shall mean Chennai, Mumbai, Kolkatta and Delhi.
• Limits for HRA exemption are subject to salary, place of residence, rent and HRA received.

Where there is a change in any of these factors, HRA calculations should be broken into
intervals of such change as explained below:
Illustration 1
Mr Homie earns a monthly basic salary of Rs 10,000 (excl HRA) for the previous year. He also
received an HRA of Rs 5000 pm. He pays a monthly rent of Rs 4000. Compute taxable HRA
assuming:
• He stays in Chennai
• He stays in Chennai and his basic salary was Rs 5000 till July
• He stays in Chennai. He stayed in his own house till July and his salary was revised from
Rs 5000 to 10000 in December.
You may assume that other components of salary remained constant in each of the above cases:
Solution:
Case 1:He stays in Chennai (Metro hence 50% of salary is taken for HRA))
Salary for HRA : 10,000*12 = 1,20,000
Actual HRA : 5,000*12 = 60,000
Rent Paid : 4,000*12 = 48,000
Exemption of HRA shall be least of the following:
• Actual HRA for the relevant period : 60,000
• Rent paid (-) 10% of salary : 48,000 – 12,000= 36,000
• 50% of Salary : 60,000
Exempted HRA shall be Rs 36000 and taxable component shall be Rs 24000 (60000-36000).
Case 2:Basic Salary was Rs 5000 till July
Particulars Apr to July (4 months) Aug to Mar (8 months)
Actual HRA 5,000*4 = 20,000 5,000*8 = 40,000
Rent paid (-) 10% salary 16,000 – 2,000 = 14,000 32,000 – 8,000 = 24,000
50% Salary (Note Below) 10,000 40,000
Exempted HRA(Least of the above) 10000 24,000
Note:Salary for relevant period 5,000*4 = 20,000 10,000*8 = 80,000
In this case HRA exemption shall be computed in two parts, since there is a change in one of
the factors relevant for determining exempted HRA
Actual HRA (5,000*12) = 60,000
Total HRA exempted (10,000+24,000) = 34,000
Taxable HRA = 26,000.
Case 3:He stayed in his own house till July and his salary was revised from Rs 5000 to 10000
in December.
In this case HRA exemption shall be computed in three parts since there are changes in two
factors relevant for determining exempted HRA at different time frames:

Particulars Apr to July Aug to Nov Dec to Mar
(4 months) (4 months) (4 months)
Actual HRA 5,000*4 = 20,000 5,000*4 = 20,000 5,000*4 = 20,000
Rent paid (-) 10% Nil – as applicant 16,000 – 2,000 = 16,000 – 4,000 =
salary stayed in his own house 14,000 12,000
50% Salary 10,000 10,000 20,000
Exempted HRA Nil 10,000 12,000
Salary for relevant 5,000*4 = 20,000 5,000*4 = 20,000 10,000*4 = 40,000
period
Actual HRA : 5000*12 = 60,000
Exempted HRA : (10000+12000) = 22,000
Taxable HRA = 38,000
Note: Where an assessee stays in his residence for whole or part of the year, no exemption of
HRA will be available during such period and the entire HRA is taxable.
3.2.2 Specified/Notified Allowances – Sec 10(14) read with Rule 2BB
These allowances can be categorized into 2 types as under:
• Those which are exempt to the extent of actual amount received or spent which ever is less
• Those which are exempt to the extent of amount received or limits specified.
Let‟s now look at each of these categories in detail:
3.2.2.a Allowances exempt to the extent of actual amount received or spent for the
performance of duty, which ever is less
Nature of Allowance Description
Traveling Allowance Allowance granted to meet the cost of travel on tour or transfer of
duty.
Daily / Per Diem Allowance granted on tour or transfer to meet daily expenses on
Allowance account of absence from normal place of duty
Conveyance Allowance Allowance granted to meet the cost of conveyance for official
purposes provided free conveyance is not given by the employer
Helper Allowance Cost of helper engaged for official purposes
Research / Academic Allowance granted for academic,research and training pursuits
Allowance
Uniform Allowance Expenditure incurred to meet the cost of purchase and maintenance
of uniform
X, an employee of a management consultancy firm was sent to UK in connection with a project
of the firm‟s client for 2 months in the previous year. In addition to his salary, the firm paid per
diem allowance for the period when he worked in UK to meet expenses on boarding and lodging.
The employer did not deduct tax at source from such allowance. During the course of assessment
of X under section 143(3), the Assessing Officer sent a notice to him asking him to explain why
the per diem allowance received by him should not be charged to tax? X sought youradvice.

Solution:Per diem or Daily allowance is not taxable to the extent it is used forofficial purposes.Ifit is
proved by MrXthat the amount was entirely spent forofficial purposes thesame shallnot taxable.
Conversely ifthe amount spent is lowerthan the amount received,such excess shallbe regarded as
taxable. The responseto the notice shallbe sent accordingly based on therelevantfacts ofthe case.
3.2.2. b Allowances exempt to the extent ofamount received or limits specified – Rule 2BB
Nature of Allowance Amount Exempt: Lower ofActual amount
received or limits given below
Children Educational Allowance Rs 100 p.m per child upto a maximum of 2 children
Hostel Expenditure Allowance Rs 300 p.m per child upto a maximum of 2 children
Tribal Area /Scheduled Area /Agency Rs 200 p.m
Area
Transport Allowance - for commut- Rs 800 p.m for normal assessees and
ing between office and residence Rs 1600 p.m for the blind and orthopaedically disabled.
Counter insurgency Allowance – Rs 3900 p.m
granted to the members of armed forces
Underground Allowance Rs 800 p.m - Granted to an employee working in
uncongenial, unnatural climate in underground mines.
High altitude Allowance – granted to For altitude between 9000 ft and 15000 ft : Rs 1060 p.m
employees of armed forces operating For altitude above 15000 ft : Rs 1600 p.m
in high altitude
Allowance to transport employees for Rs 10,000 p.m or 70% of such allowance whichever
personal expenses during duty is less. Exemption is allowed provided the employee
does not receive daily allowance.
Island duty allowance- granted to Upto Rs 3,250 p.m
employees of armed forces posted in
the islands of Andaman and Nicobar
and Lakshadweep group of islands
Border Area Allowance to members Based on place of operation. Exemption varies from
of armed forces Rs 200 p.m to Rs 1,300 p.m.
Compensatory field area allowance Upto Rs 2,600 p.m in some cases. If this exemption
is claimed, the same employee cannot claim any
exemption in respect of border area allowance
Compensatory modified field area Upto Rs 1,000 p.m in some cases. If this exemption
allowance is claimed, the same employee cannot claim any
exemption in respect of border area allowance
Highly active field area allowance Upto Rs 4,200 p.m – granted to the members of
armed forces
Special Compensatory (Hill Areas) Al- Exemption varies from Rs 300 p.m to Rs 7,000 p.m
lowances to members of armed forces

Actual amount spent is not relevant for the above mentioned allowances.
For Example: Where an employeereceives transpor t allowance of Rs 1,000 p.mand his monthly
travel expenditure for commuting between office and residence is Rs 500 still he would
be eligible for an exemption of Rs 800 pm ie lower of limits specified and actual allowance.
Illustration 2: Ascertain the taxability of the following allowances for Mr Kishore:
• Travelling allowance of Rs 50,000, given for business travel to Mumbai- he however spent
only Rs 35,000 for the purpose.
• Transport allowance of Rs 1,200 p.m for commutation between residence and office.
• Uniform allowance of Rs 25,000 was received however only 50% of the amount was spent
for the purpose.
• A fixed allowance of Rs 4,000 p.m was received towards meeting the educational and hostel
expenditure of his 3 children studying in Ooty. He spends 3 times the amount received for the
purpose.
• During his travel to Kashmir, he received a fixed sum of Rs 500 per day for 20 days, for
meeting his personal expenses. His actual expenditure was Rs 400 per day.
Solution:
Nature of Provision Tax implications
Allowance
Travelling Exempt to the extent spent Rs 15,000 (50k-35k) will be charged to
Allowance or received whichever is less taxation.
Transport Exempt @ Rs 800 p.m Rs 400 p.m (1,200-800) will be
Allowance charged to taxation.
Uniform Allowance Exempt to the extent spent Rs 12,500 (50% of 25k) will be
or received whichever is less charged to taxation.
Children‟s Educational Allowance Total Allowance (4,000*12) Rs 48,000
educational and exempt @ Rs 100 p.m* Less: Exemption
hostel allowance Hostel Allowance exempt @ Educational Allowance Rs 2,400
Rs 300 p.m* (Rs 100p.m *2 children*12)
*Subject to a maximum of 2 Hostel Allowance Rs 7,200
children (Rs 300p.m *2 children*12)
Taxable Allowance Rs 38,400
Daily Allowance Exempt to the extent spent Rs 100 per day (Rs 500-400) for 20
or received whichever is less days ie Rs 2,000 will be charged to
taxation.
3.2.3 Entertainment Allowance- Sec 16(ii)
• This allowance is eligible for deduction u/s 16(ii). Hence the whole of the allowance
received shall be added to salary and then claimed as a deduction u/s 16(ii).
• Benefit of deduction is available only for Government employees.

• Actual amount spent shall not be relevant for the purpose of deduction.
• Amount of deduction shall be the least of the following:
ƒ Actual allowance received
ƒ 20% of Basic
ƒ Rs 5,000.
Illustration 3: Mr Ramesh is a Government employee drawing a monthly salary as follows:
- Basic: Rs 15,000
- DA Rs 7,500
- Entertainment allowance Rs 5,000
Compute his total taxable salary.
Solution:
Basic (15000*12) 1,80,000
DA (7500*12) 90,000
Entertainment Allowance (5,000*12) 60,000
Gross salary 3,30,000
Less Deduction u/s 16(2) WN I 5,000
Taxable Salary 3,25,000
Working note 1
Actual Entertainment Allowance 60,000
20% Basic 36,000
Specified Amount 5,000
Exempted Allowance 5,000
Note: Entertainment allowance is initially added to gross salary at full value and then allowed
as a deduction u/s 16(ii).
3.2.4 Allowances which are exempt in the case of certain persons
• Allowance to Government employees working abroad: Allowances to a citizen of India,
being a Government employee and rendering services outside India – Sec 10(7).
• Specified Allowances to High Court and Supreme Court Judges:
ƒ According to Sec 22D(b) of the High Court Judges (Conditions of Service) Act, 1954, any
allowance paid to a Judge of a High Court u/s 22A(2) of the said Act is not taxable.
ƒ Sumptuary allowance paid to Judges of High Court and Supreme Court under the High
Court Judges (Conditions of Service) Act, 1954 and Supreme Court Judges (Conditions of
Service) Act,1958 respectively is not taxable.
Compensatory allowance received by a Judge under Ar ticle 222(2) of the Constitution is not
taxable since it is neither salary nor perquisite – Bishambar Dayal vs CIT (1976) 103
ITR 813(MP).

• Allowance to an employee of United Nations Organization (UNO) : Allowance paid by
the UNO to its employees is not taxable by virtue of Sec 2 of the UN (Privileges and
Immunities) Act, 1974.
• Remuneration earned by foreign diplomats – Sec 10(6)(ii): Remuneration earned in their
official capacity as an official or a member of staff in an embassy, high commission, legation,
commission, consulate, trade representation of foreign state shall be exempt provided:
ƒ Similar benefits are extended to Indian diplomats in the respective country.
ƒ In the case of members of the staff, the exemption shall be available only if the
following conditions are fulfilled:
– They are subjects of the country represented and
– They are not engaged in any business or profession or employment in India otherwise
than as member of such staff.
• Remuneration received from a foreign enterprise – Sec 10(6)(vi): Any remuneration
received by an individual who is a foreign citizen as an employee of a foreign enterprise for
services rendered by him during his stay in India shall be fully exempt provided:
ƒ The foreign enterprise is not engaged in any business or trade in India
ƒ His stay in India does not exceed in the aggregate a period of 90 days during the
previous year
ƒ Such remuneration is not liable to be deducted from the income of the employer
chargeable under this Act.
• Employee of a foreign ship – Sec 10(6)(viii): Any salary received by an employee of a
foreign ship is fully exempt provided:
ƒ The individual is a non resident foreign citizen
ƒ His stay in India does not exceed 90 days
• Employee of a foreign Government – Sec 10(6)(xi): Remuneration earned by an individual
working with a foreign / Government shall be fully exempt provided:
ƒ The remuneration is provided in connection with his training in India
ƒ The training is given in an establishment or office owned by:
i. The Government; or
ii. Any company in which the entire paid-up share capital is held by the Central
Government or State Government; 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 registered society wholly financed by the Central Government or any State
Government.
3.2.5 Allowances which are fully taxable:
Any allowance not forming part of 3.2.1-3.2.4 classifications above shall be fully taxable. Few
of such allowances are given below:
• Dearness Allowance
• City Compensatory Allowance

• Family Allowance
• Fixed Medical Allowance
• Bonus
• Over Time Allowance
• Lunch Allowance
• Servant Allowance
Students please note, if you come across a new allowance say special allowance or fitness
allowance etc first ensure that it does not fall within the list given under 3.2.1 to 3.2.4. Once you
are cer tain it is outside thefirst four categories simply consider theallowance to be fully taxable.
3.3 Perquisites
Perquisites are generally non monetary benefits or facilities provided by an employer.
According to Sec 17 (2), perquisite includes:
Sec Perquisite
17(2)(i) Value of rent free accommodation.
17(2)(ii) Accommodation provided on concessional rent.
17(2)(iii) Value of any benefit or amenity provided to a specified employee.
17(2)(iv) Obligation of an employee met by the employer.
17(2)(v) Employers contribution to a fund other than:
• Recognised Provident Fund
• Approved Superannuation Fund
• Deposit Linked Insurance Fund.
to effect a life assurance or a contract of annuity.
17(2)(vi) ESOP/ESOS: Value of any specified security or sweat equity shares allotted or
transferred, directly or indirectly, by the employer, or former employer, free of
cost or at concessional rate to the assessee.
17(2)(vii) Contribution to an approved superannuation fund by the employer, to the extent
it exceedsone lakh rupees.
17(2)(viii) the value of any other fringe benefit or amenity as may be prescribed.
Specified Employee – Sec 17(2)(iii):
An employee shallbe a Specified employee, if he falls into any ofthe following 3 categories:
• Director of the company
• Has Substantial Interest in the company
• Income under the head Salaries, exclusive of all benefits and non monetary amenities exceeds
Rs 50,000 p.a.
Note:
• Substantial interest u/s Sec 2(32) refers to Beneficial Ownership of not less than 20% in shares.
• Carrying voting rights.
• Not eligible for a fixed rate of dividend.

• Whetherhaving a right to par ticipate in profits or not.
• Income under the head salaries for this purpose shall include salary received or due from one or
more employers.
• Such salary shall include taxable monetary payments like Basic, DA, Bonus, Commission, HRA
etc but shall not include the value of any non-monetary benefits/perquisites.
• Salary arrived above shall be reduced by enter tainment allowance – 16(ii) and professional tax
on employment – 16(iii).
• Tax paid by employer on behalf of employee is perquisite under section 17(2) and, therefore, not
includible in salary under rule 3, for purpose of computing perquisite value of accommodation supplied by
employer to employee – Isao Sakai vs JCIT [2011] 16 taxmann.com 332 (DELHI - ITAT).
Classification ofperquisites:
Incidence of taxation on perquisites varies, depending on nature of the benefit and type of
employment. Perquisites can be broadly classified into:
• Taxable in the hands of all employees
• Taxable only for specified employees
• Tax- Free perquisites.
Let‟s now look into each of the above classification in detail.
3.3.1 Perquisites taxable in the case of all employees
i. Rent free furnished or unfurnished accommodation
ii. Accommodation provided by the employer on concessional rent
iii. Obligation of the employee discharged by the employer
iv. Employers contribution to a fund other than:
• Recognised Provident Fund
• Approved Superannuation Fund
• Deposit Linked Insurance Fund
To effect a life assurance or a contract of annuity.
v. Value of shares or securities received free of cost or at concessional rate.
vi. Value of any other benefit, amenity etc provided by the employer.
vii. The amount of any contribution to an approved super annuation fund by the employer
in respect of an assessee to the extent it exceeds Rs 1,00,000
3.3.2 Perquisites taxable only in the case of Specified employees
These perquisites can be broadly classified as:
• Employer providing gardener, sweeper,watchman etc.
• Supply of gas, electricity and water for household
• Free or concessional educational facility to any member of employee‟s household
• U s e o f Motor Car
• Personal or private journey provided free of cost or at concessional rate to an employee or a
member of house hold.

Students please note in the case of perquisites mentioned above if the expenditure is incurred by
the employee and reimbursed by the employer, value of such reimbursement shall be taxable in
the hands of all employees whether they are specified or not. Such reimbursement is in the
nature of an employee‟s obligation met by the employer.
3.3.2.a Provision by the employer of services of a gardener, watchman, sweeper or
personal attendant – Rule 3(3):
Actual salary paid by the employer to the sweeper, gardener etc shall be the value of taxable
perquisite.
Where the helpers have been employed by the employee and their salary is reimbursed by the
employer, the entire reimbursement shall be taxable in the case of both specified and non specified
employees- this transaction is similar to an obligation of the employee met by the employer.
3.3.2.b Supply ofgas electricity and water for household – Rule 3(4):
Situation Value of perquisite
Where supply is made from resources owned by the Actual manufacturing cost per unit shall
employer without purchasing from outside agency be the value of taxable perquisite.
In any other case Amount paid by the employer to the
supplying agency.
3.3.2.c Free or concessional Educational facilities to any member ofemployee’s household
Rule 3(5):
Situation Value of perquisite
Educational institution is owned and Cost of similar educational facility in or near locality
maintained by the employer Note: In the case of education to employee’s children,
value of this perquisite shall be nil,provided the cost ofWhere free education is allowed in any
other institution by virtue of his being such education does not exceed Rs.1000 pm per child.
in employment of that employer
In any other case Amount of expenditure incurred by the employer.
Member of Household shall include:
• Spouse
• Children and their spouses
• Parents
• Servants and dependants.

In the case of educational facilities provided to employee‟s children, the perquisite is exempt if the value
of such facility does not exceed Rs 1000 pm per child. However if it exceeds Rs 1,000 p.m. per child, the
entire amount is chargeable to tax. For example if the value of the perquisite is Rs 2,500
p.m. per child, the entire Rs 2,500 is chargeable to tax. The limit provided in this clause is not a blanket exemption
however only a conditional exemption andshall not be applicable if the amount exceeds Rs 1,000 p.m.
Value of any amount recovered from the employee on account of the perquisites shall be reduced
from the value of taxable perquisite as given above.
Where the cost of education for employee‟s child exceeds Rs 1000 per month per child the
entire amount shall be considered as taxable perquisite. For the purpose of determining
cost ofeducation,both direct andindirect costs shallbe taken into consideration. – CIT vs
Director Delhi Public School [2011] 202 TAXMAN 318 (PUN. & HAR.)
Note: The remaining perquisites namely motor car and transport benefits are discussed
under valuation ofperquisites.
Illustration 4
Mr Swaroop is working with X Ltd drawing a monthly basic of Rs 3,000. This apart he works
part time with Y Ltd and receives a monthly remuneration of Rs 1,000. X Ltd has given him an
Enfield Thunderbird Bike for the purpose of his official and personal travel. Fair market value of
the bike is Rs 95,000. Swaroop received an annual bonus of Rs 2,000. Determine whether he is a
specified employee or otherwise assuming:
- He is not a director of X Ltd and Y Ltd
- He has substantial interest in X Ltd
- He is a director of Y Ltd
- His annual bonus was Rs 4,000 instead of Rs 2,000.
Solution:
Annual monetary receipt of Mr Swaroop:
Salary from X Ltd (3000*12) 36000
Salary from Y Ltd (1000*12) 12000
Annual Bonus 2000
Total Monetary Receipts 50000
Since annual monetary receipts do not exceed Rs 50,000, Mr Swaroop is not a specified
employee based on income criteria.
Note: Motorcycle given to employee is not a taxable perquisite. Moreover perquisites are not
considered in determining whether the assessee is a specified employee or not.
Situation Status in X Ltd Status in Y Ltd
He is not a director of X Ltd and Y Ltd Not a specified employee Not a specified employee
He has substantial interest in X Ltd specified employee Not a specified employee

He is a director of Y Ltd Not a specified employee specified employee
His annual bonus was Rs 4,000 specified employee specified employee
instead of Rs 2,000- His monetary
receipts would now be Rs 52,000.
Illustration 5
Mr Hitesh working for JP Morgan earns the following as his monthly pay:
Basic : Rs 25,000
DA : Rs 15,000
Transport Allowance : Rs 1,500
Apart from the above, Hitesh is also provided with 2 housemaids for whom a monthly salary of
Rs 2,000 each is paid. His entire domestic expenditure pertaining to gas and electricity was fully
met by his employer. This expenditure amounted to Rs 5,000 p.m on an average. 2 of his
children are given education in a school owned and maintained by his employer. Cost of similar
education in the locality would cost a minimum of Rs 15,000 p.a per child.
Solution:
Basic (25,000*12) 3,00,000
Allowances
DA (15,000*12) 1,80,000
Transport allowance (Note 1) (1,500*12) 18,000
Less Exempted allowance (800*12) 9,600 8,400
Perquisites
Housemaid Note 2 (2,000*2*12) 48,000
Gas and electricity Note 2 (5,000*12) 60,000
Children's educational facility Note 2 (15,000*2) 30,000
Note:
1 Transport allowance is exempt @ Rs 800 p.m
2 Since Mr Hitesh is a specified employee (annual monetary receipts exceed Rs 50,000),
benefits of housemaids, gas, electricity and educational facility are fully taxable. Value of
taxable perquisite will be the cost of the facilities to the employer.
3 Assumed that Mr Hitesh was in employment for the entire previous year
3.3.3 Tax Free Perquisites – For all employees
• Medical Facility or reimbursement:
ƒ Discussed under taxation of medical benefits
• Food and Beverages provided to an employee:
ƒ Food or beverage provided in office or factory premises
ƒ Provided through Non-Transferable vouchers usable only in eating joints
• Recreational facilities provided to a group of employees (not restricted to a selected few)

• Loans to employees:
ƒ Loan does not exceed Rs 20,000
ƒ Loan given for specified medical treatment. However no exemption is available if the loan
for medical treatment has been reimbursed under any medical insurance scheme.
• Perquisites provided outside India by Government to its employees, who are citizens of India,
rendering services outside India – Sec 10(7)
• Training expenditure on employees.
• Rent free residence and conveyance facility provided to a judge of High Court or Supreme Court
• Rent free furnished accommodation provided to officers of Parliament, Union Minister or
Leader of Opposition.
• Accommodation in a Remote area (explained under valuation of perquisites)
• Educational facility for children where the facility, is owned by the employer or is provided
by virtue of his employment and the value of such facility does not exceed Rs 1000 pm
• Use of health clubs, sports facility etc provided by the employer if facilities are uniformly
available to all employees.
• Use by employee or any member of his household of laptops and computers owned or hired
by the employer
• Telephone expenses actually incurred.
• Employers contribution to deferred annuity, pension and staff group scheme
• Leave TravelConcession to the extent specified
• Accident Insurance policy premium
• Tax paid by the employer on the value of non monetary perquisites of the employee shall be
exempt u/s 10(10CC). There shall be no tax liability on such tax paid on behalf of the employee
as non monetary perquisite- RBF Rig Corpn vs ACIT – 2007 165 Taxman 101(Delhi). For
example, if Mr Ram receives Rs 12 lacs as salary including non monetary benefits and his
company pays a sum of Rs 50k as tax on non monetary perquisites on behalf of Mr Ram, the total
taxable salary of Mr Ram shall be Rs 12 lacs only and not Rs 12.5 lacs (Rs 12 lacs plus Rs 50k).
• Motor car provided to a non specified employee including the expenses incurred in this
behalf on employee‟s car.
• Amount given by employer to employee’schild as scholarship is exempt u/s 10(16).
 Notified perquisites paid both to serving Chairman and members of Union Public
Service Commission 
3.4 Valuation of Perquisites- Rule 3 (Notification no 94 dated 18-12-2009)
Valuation is one of the most important topics of this chapter. You can expect comprehensive
problems based on this topic. Perquisites, as we are aware, are non monetary benefits, however,
income tax is a tax on financial rewards earned by an employee. To quantify non monetary
benefits in monetary terms we have Rule 3 which provides for the rules of valuation.
Following are the perquisites for which valuation norms have been specified vide Rule 3:
i. Accommodation provided by the employer
ii. Fringe Benefits taxable in the hands of the employee
iii. Valuation of fringe benefits where the employer is not liable for fringe benefit tax
iv. Medical Expenses

v. Leave TravelConcession
vi. Life insurance premium/ deferred annuity etc paid by the employer
vii. Employee Stock Option Plans (ESOP)
Let us now look into each of the above perquisite in detail:
3.4.1 Accommodation provided by the employer- Rule 3(1)
This category of perquisite can be studied as follows:
A. Rent free or concessional accommodation
B. Accommodation in a hotel
C. Accommodation in a Site or Remote area
D. Accommodation on transfer .
3.4.1.a Rent free accommodation or accommodation provided at concessional rates:
• Accommodation provided to Government employees (employees of Union or State Government):
Unfurnished Accommodation Furnished Accommodation
License fee: License fee:
Less: Rent recovered Add: 10% of the cost of assets
Value of taxable perquisite Add: Actual hire charges
Less: Rent recovered
Value of taxable perquisite
License fee shall be the value determined by the Government. Students please note,
this value will be explicitly given in the question.
In the case of any other employee:
Type of Population of the city, as per 2001 census, where accommodation is provided
Accommodation Exceeds 25 lacs Between 10 lacs and 25 lacs Upto 10 lacs
Owned by employer 15% of salary 10% of salary 7.5% of salary
Leased/rented by Actual lease/rent paid by the employer or 15% of salary-
the employer Whichever is lower
Meaning of Salary:
Salary = Basic + DA taken for retirement benefits + Bonus + Commission + Fees +
All Taxable Allowances + All Taxable Monetary Payments.
However it excludes:
• Employer‟s contribution to Provident Fund
• Allowances exempt from Tax
• Value of Perquisites.
Note: Salary shall be computed on accrual basis for the period for which the accommodationis
occupied by the employee.

- Where salary is received from more than one employer, salary from all the employers shall be taken
into consideration even though the accommodation is provided by one of the employers.
- Monetary payments which are in the nature of a perquisite shall not form par t of salary as all
perquisites shall be excluded.
- Salary formula/definition is common for all accommodation perquisites like hotel
accommodation and accommodation on transfer.
Where the accommodation is provided byCentralGovernment orState Government to an employee
who is serving on deputation with any bodyorundertaking underthe controlofsuch Government:
- The employer of such employee shall be deemed to be that body or under taking where the
employee is serving on deputation,and
- The value of perquisite of such an accommodation shall be computed as if such
accommodation is owned by the employer.
Inserted by notification no 94/2009 dated 18th
December 2009.
Where accommodation is provided by BSNL to Central Government employees on deputation to BSNL,
which is a public sector company controlled by Central Government, it was held that for the purpose of
computing perquisite value of housing accommodation, rules prescribed for employees of BSNL (non
Government employees)shallhave to be considered – V.Surendranvs CBDT (2009)182 Taxman
211(Ker).
Assessee's employer had incurred heavy expenses towards repairs and renovations of leased accommodation
occupied by assessee. The Assessing Officer held that said expenditure was perquisite under section 17(2)(iv) since
it was incurred to suit requirements of employee and it had nothing to do with performance of his duties. It was
held that it is not permitted to deviate from prescribed method as stipulated in Rule 3 for computing value of rent
free accommodation after renovation – Scott R. Bayman Vs CIT [2012] 24 taxmann.com 214 (Delhi)
• The above value of perquisite shall be reduced by the amount of rent recovered
from the employee.
• Where the question is silent on whether the city has a population in excess of 10 lacs
or otherwise, please make a suitable assumption and proceed with the solution.
• Where furnished accommodation is provided by the employer, the following amounts shall be
added to the value of perquisites computed above:
• 10% of the cost of Furniture if owned by the employer
• Actual hire charges if the furnishings are taken on lease by the employer.
X is entitled to a salary of Rs. 25,000 per month He is given an option by his employer either to
take house rent allowance (HRA) or a rent-free accommodation which is owned by the company
The HRA amount payable is Rs.5.000 per month. The rent for the hired accommodation is Rs.
6,000 per month at new Delhi. Advice X whether it would be beneficial for him to avail HRA or
rent free accommodation Give your advice on thebasis net take home cash benefits
Solution:
Computation of most favourable option for Mr X
Particulars Rent free accommodation HRA
Salary 3,00,000 3,00,000
Value of Taxable Perquisite (WN 1) 45,000 0
Taxable HRA (WN 2) 0 18,000
Total Taxable Salary 3,45,000 3,18,000
Tax Liability (WN 3) 17,000 14,210
Total Cash Received from the Employer

Particulars Rent Free Accommodation HRA
Salary 3,00,000 3,00,000
HRA 0 60,000
Less Tax Liability 17,000 14,210
Net Take home pay 2,83,000 3,45,790
Less Rent Payable 72,000
Net Cash inflow 2,83,000 2,73,790
Based on the above computation, it is suggested that Mr X should opt for a rent free accommodation
as the net cash inflow is higher in this option
Working Note 1 - Value of Rent Free Accommodation
Salary 3,00,000
Value of taxable perquisite @ 15% 45,000
Working Note 2: Computation of Taxable HRA
Actual HRA 60,000
Rent Paid - 10% Salary 42,000
50% Salary 1,50,000
Exempted HRA (Least of the above) 42,000
Total HRA 60,000
Taxable HRA 18,000
Working Note 3: Computation of Tax Liability
Tax Slab Rent Free Accommodation HRA
First Rs 1,80,000 Nil Nil
Balance @ 10% 16,500 13,800
Total Tax 16,500 13,800
Add Cess @ 3% 495 414
Total Tax liability (rounded off) 17,000 14,210
Illustration 6
Mr Sebin is working with Kotak Mahindra for the past 4 years. His monthly emoluments include
the following:
Basic : 25,000
DA (50% taken for retirement) : 10,000
Uniform Allowance : 5,000
This apart, Mr Sebin is also provided with accommodation at the company‟s own guest house at
Chetpet (Chennai). The property is owned by the company and its fair rental value is Rs.60,000 p.a.
The property is fully furnished with furniture costing Rs 5 lacs and with ACs taken on rent @ Rs
20,000 p.m. Entire Uniform Allowance was spent for the purpose. Compute taxable salary. Would
your answer be different if the property was taken on lease by the company at the fair rental value?

Solution:
Case 1: Property owned by the company
Computation of Income under the head Salaries:
Basic (25,000*12) 3,00,000
Allowances
DA (10,000*12) 1,20,000
Uniform allowance (Note 1) Nil
Perquisites
Rent free furnished accommodation WN 1 3,44,000
Working Note 1 Computation ofrent free furnished accommodation
Rent free un furnished accommodation (WN 1A) 54,000
Add Value of furnishings (WN 1B) 2,90,000
Value of Rent free furnished accommodation 3,44,000
Working Note 1 A Computation ofRent free un furnished accommodation
Value of taxable perquisite = 15% of Salary (15% of Rs 3,60,000)
= 54,000
Salary: Basic + DA (considered for retirement)+ Taxable monetary allowances and
payments = 3,00,000+60,000 = 3,60,000
Working Note 1 B Computation ofvalue offurnishing
Value of Furnishings : 10% of Actual cost of furniture + Actual hire charges
: 10% of Rs 5 lacs + Rs 20,000*12
: 2,90,000
Note 1 Uniform allowance is exempt to the extent spent.
2 Its assumed that Chennai had a population in excess of 25 lacs as per 2001 census
Case 2: Property is taken on lease by the company
Working Note 2: Computation ofRent Free Furnished Accommodation
Rent free unfurnished accommodation (WN 2A) 54,000
Value of furnishings (WN 1B) 2,90,000
(Same as Case 1)
Value of rent free furnished accommodation 3,44,000
Working Note 2A: Computation ofRent Free Unfurnished Accommodation
Value of taxable perquisite = 15% Salary or Actualrent whichever is less
= Rs 54,000 or Rs 60,000 whichever is less
= 54,000
Salary : Basic + DA (considered for retirement)+ Taxable monetary allowances and payments
= 3,00,000+60,000 = 3,60,000
Since value of taxable perquisite is same,there would not be any change in gross salary.

3.4.1.b Accommodation provided by the employer in a hotel (applicable for all employees):
Value of perquisite shall be the least of the following:
• 24% of salary paid or payable for the period during which the accommodation was provided, or
• Actual hotel charges paid or payable.
Exception: Hotel accommodation shall not be taxable if
• Such accommodation is provided for a period not exceeding 15 days in aggregate, and
• Such accommodation is provided on an employee‟s transfer from one place to another.
Note 1: Where the hotelaccommodation is provided for more than 15 days, say 20 days, only
the days in excess of 15 i.e. 5 days shall be charged to taxation on the above criteria.
Where the hotel bill includes charges for services which are an integral par t of the
accommodation, the entire value of the bill shall be considered as cost of accommodation.
Howeverwhere such billalso includes separate charges forallied services like lunch,
laundry etc, such expenses shall be considered separately based on valuation rules prescribed-
Circular No 1/2010 dated 11-1-2010.
Accommodation provided during business travelis not a taxable perquisite.
Illustration 7
Mr. Nimish an employee of Citigroup has been transferred from Mumbai to Pune. Due to his
transfer, Nimish was temporarily given accommodation in a hotel for a period of 20 days. He
was placed in Hotel Grand Hyatt where his daily rental was Rs 10,000. Nimish was the Vice
President of his company and is drawing a monthly Salary of Rs 1.50 lacs.
Solution:
Value of Taxable perquisite : Actual hire charges or 24% of salary
(Whichever is less) in excess of 15 days for the relevant period
: lower of Rs 50,000 or Rs 6,000(W.N.1)
: Rs 6,000
Working note 1: Computation of salary for the relevant period
Total Period of Stay 20 days
Less Exempted Period 15 days
Taxable period of Stay 5 days
24% Salary for the relevant period @ Rs 1.50 lacs p.m Rs 6,000
(Rs 1,50,000*5/30*24%)
Actual Hire charges for 5 days @ Rs 10k per day Rs 50,000
Note:
• Number of days in excess of 15 days only will be considered for valuation.
• It‟s assumed that salary given is salary (as defined) for the purposes of valuation.

3.4.1.c Accommodation provided at certain sites or in a remote area:
Accommodation provided by the employer shall be tax free if such accommodation is provided
to an employee working at either of the following:
• Mining site
• On shore oil exploration site
• Project execution site
• Dam site
• Power generation site
• Off shore site
The above accommodation shall be exempt from taxation provided such accommodation is:
ƒ Temporary in nature and having a plinth of not more than 800 sqft and located not less than
8 kms from local limits of any municipality or cantonment board, or
ƒ Located in a remote area i.e an area located at least 40 kms away from a town having a
population not exceeding 20,000.
3.4.1.d Accommodation provided at a new place of posting on transfer while
retaining accommodation at the earlier place of work:
• Where on transfer
• An employee is provided with an accommodation at the new place of posting retaining the
accommodation at his earlier place of work
• For a period not exceeding 90 days
• Value of taxable perquisite shall be only one such accommodation (accommodation with the
lower value).
• Beyond 90 days value of perquisite shall be for both such accommodations.
3.4.2 Valuation of Fringe Benefits
Fringe Benefits for the purpose of valuation include:
ƒ Interest free loans or concessional loans
ƒ Use of movable assets
ƒ Transfer of movable assets
ƒ Other Fringe Benefits
3.4.2.a Interest free loans or loans at concessional interest - Rule 3(7)(i):
The value of any benefit resulting from loans given to employees or any member of his
household during the relevant previous year by the employer shall be a taxable perquisite.
Value of taxable perquisite can be viewed under two circumstances
namely: - Where there is principal repayment
Sum of Maximum monthly * (Bench mark rate – Interest outstanding
Value of Taxable outstanding balances recovered from employee)
Perquisite ------------------------------------------------------------------------------------
12 months

The above formula is applicable in cases where there is principal repayment of loan during the
previous year.
Bench mark is the rate charged by SBI on similar loans (Housing loan, car loan etc) as
at the beginning of the previous year i.e on 1st
of April of the relevant previous year.
Any subsequent revision in rates by SBI will not have impact on tax calculations.
STATE BANK OF INDIA : INTEREST RATES
Interest Ratescharged by State BankofIndia as on 1st April, 2012 (applicable forAY 2013-14) on various
loans in PersonalSegment advancesusedforthe purpose of computingperquisitevaluation are as under:
HOME LOANS
Upto Rs. 30 lakhs Above Rs.75
Rs.30 lakhs to Rs. 75 lakhs lakhs
Interest rate during 1styear 10.75% 11% 10.00%
EDUCATION LOANS
Upto Rs. 4 Rs. 4 lakhs Above Rs 7.5 Concession for
lakhs to Rs. 7.5 lakhs lakhs Girl Students
SBI Student Loan 13.5% 13.25% 12% 0.50%
Car Loan Two wheeler Loan Personal Loan
12% 18.25% 18.5%

- Where there is no principal repayment during the previous year:
Value of
taxable
perquisite
Loan Value * (Bench Mark rate – Interest recovered) *
Number of months for which the loan was outstanding
---------------------------------------------------------------------
12 months
• Member of household shall include:
ƒ Spouse(s)
ƒ Children and their spouses
ƒ Parents
ƒ Servants and dependants
• Where the loan is given interest free by the employer, interest recovered will be taken as Nil for
calculation and the entire Bench Mark rate will be considered for valuation of perquisites.
• Value of perquisite shall not include interest on the following loans:
ƒ Where the loan is given for medical treatment of specified diseases given under Rule 3A.
However exemption is not applicable to so much of the loan as has been reimbursed to the
employee under any medical insurance scheme
ƒ Where the originalloan value does notexceed Rs 20,000 in aggregate
• Where loan was granted by a bank to its employee at a rate lower than the bench mark rate of State
Bank of India, such a loan would be regarded as a concessional loan and charged to taxation as a
perquisite. The fact that the cost of funds for the bank was lower than the benchmark rate would be
consideredforthe purpose ofperquisite valuation-All India Punjab National Bank
Officer’s Association vs Chairman cum Managing Director,Punjab National Bank (2010)190
Taxman 221 (MP).
Specified diseasesunder Rule 3Ashall mean:
- cancer;
- tuberculosis;
- acquired immunity deficiency syndrome;
- disease or ailment of the heart, blood, lymph glands, bone marrow, respiratory system,
central nervous system, urinary system, liver, gall bladder, digestive system, endocrine
glands or the skin, requiring surgical operation including ailment or disease of the organs
specified, requiring medical treatment in a hospital for at least three continuous days;

- ailment or disease of the eye, ear,nose or throat, requiring surgical operation;
- fracture in any part of the skeletal system or dislocation of vertebrae requiring surgical
operation or orthopaedic treatment;
- gynaecological or obstetric ailment or disease requiring surgical operation, caesarean
operation or laperoscopic intervention;
- gynaecological or obstetric ailment or disease requiring medical treatment in a hospital for
at least three continuous days;
- burn injuries requiring medical treatment in a hospital for at least three continuous days;
- mental disorder - neurotic or psychotic - requiring medical treatment in a hospital for at
least three continuous days;
- drug addiction requiring medical treatment in a hospital for at least seven continuous days;
- anaphylectic shocks including insulin shocks, drug reactions and other allergic
manifestations requiring medical treatment in a hospital for at least three continuous days.
X has taken an interest-free loan of Rs.10 lakh from his employer-company. The
amount is utilized by him or purchasing a house on June 30, 2010. The house is self-
occupied. As per the scheme of the company, loan would be recovered in 40 equal
monthly installments recoverable immediately after the completion 18 month from the
date of purchase. The SBI lending rate of similar loan on April 1, 2012 is 10.75 per cent. Calculate
the perquisite value of such loan in the hands of X for the assessment year 2013-14. Is it possible to
get deduction of perquisite value of interest under section 24(b)? Does it make any difference, if
the house is given on rent?
Solution:
Last day of each month Maximum outstanding
balance
Rs.
April 30,2011 10,00,000
May 31,2011 10,00,000
June 30,2011 10,00,000
July 31,2011 10,00,000
August 31,2011 10,00,000
September 30,2011 10,00,000
October 31,2011 10,00,000
November 30,2011 10,00,000
December 31,2011 10,00,000
January 31,2012 9,75,000
February 28,2012 9,50,000
March 31,2012 9,25,000
Sum of monthly outstanding 1,18,50,000
balances
Value of perquisite = [Sum of maximum monthly outstanding balances * / 12 (benchmark rate-rate
recovered)]
= 11850000/12*10.75%
= Rs 1,06,156.25

It is not possible to claim perquisite value of interest as deduction under section 24 since there is no
interest payment being made to the employer. Also similar to sec 49(4) or 49(2AA), there is no deemed
payment provision available fornotionalinterest benefit on loans which have beencharged u/s 17.
If a closely held company gives a loan to an employee who holds at least 10% voting power,
such loan is deemed as dividend u/s 2(22)(e) provided the conditions prescribed are fulfilled.
Even in such a case,the perquisitevalue ofinterest free loan is chargeable to tax– CIT vs
T.P.S.H Selva Saroja (2003) 131 Taxman 1 (Mad)
Illustration 8
Mr Lokesh is working with ICICI as a Senior Sales manager drawing a monthly salary of Rs
45,000. On 1st of May, he took a housing loan from his employer for purchasing his house at a
total cost of Rs 30 lacs. 50% of the cost was funded through loan @ 7% while the market rate
(SBI rate) was @ 10.75%. Determine the value of taxable perquisite assuming:
• There is no principal repayment
• He repays a sum of Rs 15,000 at the end of every month towards principal.
Solution:
Case 1: No principal repayment
Value of
taxable
perquisite
Loan Value * (Bench Mark rate – Interest recovered) * Number of months for which the
loan was outstanding
-------------------------------------------------------------------------------------------------
12 months
: Rs 15lacs (10.75%-7%)*11months/12 months = Rs 51,563
Case 2: Monthly repayment ofRs 15,000 towards principal
Sum of Maximum monthly * (Bench mark rate – Interest outstanding
Value of Taxable balances recovered from employee)
Perquisite --------------------------------------------------------------------------------
12 months
: Rs 15675000* (10.75%-7%)/12 months = Rs 48,984
Computation of maximum monthly outstanding balances:
Month
Maximum monthly
outstanding balances
May 15,00,000
June 14,85,000
July 14,70,000
August 14,55,000
September 14,40,000
October 14,25,000
November 14,10,000
December 13,95,000
January 13,80,000
February 13,65,000
March 13,50,000
Total 1,56,75,000

3.4.2.b Use of movable Assets by an employee or a member of his household – Rule
3(7)(vii):
Assets used Value of Taxable Perquisite
Laptops and computers Nil
Assets other than laptops, computers and 10% p.a of the actual cost if the asset is
those specified in rules owned by the employer
Or
Actual rent paid or payable by the employer
1. Any amount recovered from the employee shall be reduced from the above value.
2. Motor cars shall be valued in accordance with Rule 3(2A).
3.4.2.c Transfer of any Movable Assets directly or indirectly to an employee or a
member of his household – Rule 3(7)(viii):
Value of Taxable Perquisite: Fair market value of asset less Amount recovered from the
employees.
Assets transferred Value of Taxable Perquisite
Computers and Actual cost (-) 50% depreciation for each completed year of use under
electronic items reducing balance method Less amount recovered from employee
Motor car Actual cost (-) 20% depreciation for each completed year of use under
reducing balance method Less amount recovered from employee
Any other Asset Actual cost (-) 10% depreciation for each completed year of use under
straight line method Less amount recovered from employee
3.4.2.d Other Fringe Benefits– Rule 3(7):
Rule Benefit Situation Value of taxable
perquisite
Travelling, tour and Facility is maintained by the Value of similar facility
3(7(ii) accommodation expenses employer and is not uniformly offered by other
of employee and his available to all employees agencies
family reimbursed by Employee is on a official tour Actual expenditure
employer other than leave and expenses are incurred for incurred for such
travel concession specified any member of household member of household
under Rule 2B accompanying him
Official tour is extended to Actual cost of such
vacation extended vacation
In any other case Actual amount
reimbursed

3(7) Free food and non Tea and snacks provided during Nil
(iii) alcoholic beverages working hours
Free food and non alcoholic Nil
beverages provided during
working hours in:
- Remote area
- Off shore location
Free food and non alcoholic Nil, if the value in either
beverages provided during case does not exceed Rs
working hours: 50 per meal
- In office or business premises
- Through non transferrable
vouchers usable only at eating
joints
In any other case Actual amount incurred
3(7) Gift, voucher or token Where the aggregate value of Nil
(iv) received such gifts, token or voucher is
Caveat: below Rs 5000 per annum
Students please note, if In any other case Actual value of such
the value of gifts received gifts received
in aggregate is Rs.5000 or
more, the entire amount
shall be considered as
taxable perquisite.
3(7) Expenses on credit cards Where such expenses are wholly Nil- provided the
(v) including add on cards. and exclusively for official conditions in Note
Expenses for this purpose purposes below are fulfilled
shall include membership In any other case Actual amount
and annual fees. reimbursed/paid by the
employer
3(7) Club membership and Where such expenses are wholly Nil- provided the
(vi) expenses in a club and exclusively for official conditions in Note
Where the employer purposes below are fulfilled
has obtained corporate In any other case Actual amount
membership of the club reimbursed/paid by the
and the facility is enjoyed employer
by the employee or any
member of his household,
the value of perquisite
shall not include the initial
fee paid for acquiring such
corporate membership.

3(6) Free or concessional journey Where employer is an Nil
for employees and their airline or railways
family where the employer
is engaged in carriage of In any other case Value at which such facility is
passengers or goods. provided to general public
3(7) Any other benefit, amenity, Arm‟s length price or fair market
(ix) right, privilege or service value of such benefit or facility
Note:
- Conditions for claiming expenses as wholly official in nature:
ƒ Complete details including the date and nature of the expenditure is maintained
ƒ Employer should give a cer tificate to such effect.
- Any amount recovered from employees shall be reduced from the value arrived above.
- There shall be no perquisite for use of health club, spor ts and similar facilities provided uniformly
to all employees.
- Where the employer has obtained corporate membership in a club and the facility is enjoyed by the employee
and his family, value of theinitial fee paid for membership shall not be considered as perquisite.
No perquisite in case of expenses on telephone or mobile incurred for official purposes.
If the company has provided money to an officer to purchase the club membership and if the
subscription and the amount incurred by the officers for their personal benefit is reimbursed by
the company, such amounts spent by theofficers of the company can not be considered
as business promotion expenses in such event,that would fall undersection 17(2)(iv) – CIT vs Wipro
Systems (2010) 325 ITR 234 (Kar).
3.4.3. Valuation of Motor Car as a Perquisite – Rule 3(2) – Taxable only for Specified
Employees – As amended by notification no 94/2009 dated 18th December 2009.
Car owned Maintenance Purpose of Engine capacity does Engine capacity
or hired by: expenses met by the car not exceed 1.6 litres exceeds 1.6 litres
Employer Official Nil – subject to relevant documents being
maintained
Employer Personal
Actual maintenance expenses + Salary to
Driver + 10% of the cost of the car
Employer Partly official 1,800 p.m+ 900 p.m if 2400 p.m+ 900 p.m if
Employer and partly driver is provided driver is provided
600 p.m+ 900 p.m if 900 p.m+ 900 p.m if
Employee personal
driver is provided driver is provided
Employer Official
Nil – subject to relevant documents being
maintained
Employee Partly official Actual expenditure Actual expenditure less
Employer and partly less (1800 p.m+ (2400 p.m+ 900 p.m if
900 p.m if driver is
personal driver is provided)
provided)

A higher deduction in excess of Rs 1800/ 2400 can be claimed subject to maintenance of
specified documents.
Apart from motor car,if any other vehicle is provided by the employer, value of taxable
perquisite shall be computed in the following manner
Vehicle owned Maintenance Purpose of Value of taxable perquisite
or hired by: expenses met by the vehicle
Official Nil – subject to relevant documents being
maintained
Employer Employer Partly official Actual expenditure less Rs 900 p.m. A
and partly higher deduction can be claimed subject
personal to maintenance of relevant documents
- Where more than one car is provided to an employee (otherwise than for
exclusive official purposes):
ƒ Consider one as being used for par tly official and par tly
personal
ƒ All other cars shallbe considered as ifthey are entirely used forpersonalpurposes
- Specified documents to be maintained:
o Employer shall maintain complete details of journey under taken for official purposes including:
ƒ Date of journey
ƒ Destination
ƒ Mileage
ƒ Expenditure incurred
o Cer tificate from the employer to such effect.
- The use of an official vehicle fromoffice to residence and vice versa shall not be regarded as a
benefit to employees and hence exempt from taxation.
- Conveyance facility providedto judges ofHigh Court and Supreme Court are exempt from taxation.
Where a car is owned by the employee, maintenance is met by the employer and the car is
used for personal purposes, expenses reimbursed shall be categorized as “obligation of an
employee met by the employer” and shallhence be taxable forall categories ofemployees.
Any amount recovered from an employee shall be reduced from the value of taxable perquisites.
Illustration 9
Mr Arnab is working with Now News Channel as a Chief Editor drawing a monthly
remuneration of Rs 2 lacs. Apart from salary Mr Arnab also received/used the following assets.
Compute his total taxable salary income.
• 2800 CC Audi A 4 car,worth Rs 65 lacs.
• Sony VAIO laptop worth Rs 2 lacs. This lap top was used by him till 1st June after which it
was sold to him for Rs 50,000. The laptop was purchased on 30th May last year.

• Teakwood sofa used at his own residence: worth Rs 1 lac. He also received a Bose Music
System worth Rs 2 lacs for usage at his residence.
• 2 Daikin Air conditioners taken on a consolidated monthly rent of Rs 15,000.
• His kitchen was furnished with Modular cabinet fittings at an overall outlay of Rs 5 lacs. The
entire expenditure was borne by the company and the asset is recorded in its books as part of
fixed assets.
• He acquired a Mercedes SLK for Rs 5 lacs. The car was used by the company for 2 years and
was purchased for Rs 50 lacs.
• His son was given an HP personal computer worth Rs 50,000 for personal use.
• 2 watchmen on a monthly salary of Rs 5,000 each.
Solution:
Computation of Income under the head Salaries ofMr Arnab
Base Salary (Rs 2 lacs*12) 24,00,000
Perquisites
Motor Car WN 1 28,800
Use of Movable Assets WN 2 2,60,000
Transfer of Movable assets WN 3 27,50,000
Watchmen WN 4 1,20,000
Gross Salary 55,58,800
Note 1: Motor car & Watchman are taxable perquisites in the hands of specified employee.
Working note 1 - Computation ofvalue oftaxable perquisite - Motor car
Engine capacity of the car 2,800 cc
Monthly value of taxable perquisite 2,400
Annual value of taxable perquisite 28,800
Note: It is assumed that the car is used for both official and personal purposes.
Working Note 2- Use ofMovable Assets
A Sony Laptop and HP computer used are not a taxable perquisites
B Particulars Value of Asset Perquisite @ 10% on cost
Teak Wood Sofa 1,00,000 10,000
Music System 2,00,000 20,000
Modular Kitchen Cabinet 5,00,000 50,000
Add Hire Charges for Air conditioners @ Rs 15,000 p.m 1,80,000
Value of taxable perquisite 2,60,000
Working Note 3- Transfer ofMovable Assets
Asset Value of Perquisite
Laptop (WN 3A) 50,000
Mercedes SLK (WN 3B) 27,00,000
Total value oftaxable perquisite 27,50,000

Working Note 3A - Transfer ofLaptop
Purchase Price 2,00,000
Number of completed years of use 1 year
Rate of Depreciation 50% written down value
Total Depreciation 1,00,000
Written down Value 1,00,000
Less Amount Recovered from the employee 50,000
Value of Taxable perquisite 50,000
Working Note 3B - Transfer ofMercedes SLK
Purchase Price 50,00,,000
Number of completed years of use 2 year
Rate of Depreciation 20% written down value
Depreciation
1st year (20% of 50,00,000) 10,00,000
2nd year Depreciation 8,00,000
(Rs 50 lacs - 1st year
depreciation)*20%
Total Depreciation 18,00,000
Written down Value 32,00,000
Less Amount Recovered from the employee 5,00,000
Value of Taxable perquisite 27,00,000
Working Note 4 - Provision ofWatchmen
Total number of watchmen 2
Monthly salary paid for each 5,000
Total value of taxable perquisite 1,20,000
3.4.4 Medical Expenses- Proviso to Sec 17(2)
Incidence of taxation on medical expenses incurred by the employer can be classified in to two
categories as follows:
• Medical treatment in India
• Medical treatment outside India.
Let‟s now look into these classifications in some detail:
3.4.4.a Medical Treatment in India:
In the case of medical treatment expenses within India, the following expenses shall be treated
as tax free perquisites:
• Value of any medical treatment provided to an employee or a member of his family in any
hospital maintained by the employer.

• Any sum incurred by the employee towards his medical treatment or that of any of his
family members in any hospital, clinic or otherwise up to Rs 15,000 per annum. In other
words, reimbursement of medical expenditure up to Rs 15,000 per annum is tax free.
• In the following cases expenses incurred by the employer on the medical treatment of his
employee and his family members shall be fully tax free:
ƒ Actual expenditure incurred in any hospital maintained or approved by the Government
or any local authority
ƒ Expenditure incurred towards treatment of diseases prescribed under Rule 3A like
cancer,AIDS,tuberculosis, treatment for drug addiction etc.
• Health insurance premium paid by the employer under an approved health insurance
scheme.
• Reimbursement of health insurance premium paid under an approved insurance scheme for
the benefit of employee and his family.
3.4.4.b Medical Treatment outside India:
In the case of medical treatment expenses outside India, the following expenses shall be treated
as tax free perquisites subject to the conditions prescribed:
Expenditure Description /Situation Taxability
Treatment Expenses on medical treatment provided to an Exempt to the extent
Expenses employee or a member of his family outside permitted by Reserve
India Bank of India (RBI)
Accommodation Expenses on stay abroad of the employee or Exempt to the extent
Expenses any member of his family together with one permitted by Reserve
attendant in connection with such treatment Bank of India (RBI)
Travel expenses of Where gross total income of the employee, Fully exempt
the patient together before the inclusion such travel expenditure
with an attendant as perquisite does not exceed Rs 2,00,000
In any other case Fully taxable
• Family for the purposes ofmedical treatment shall mean:
• Spouse
• Children – may be dependant or independent/ married or unmarried
• Parents, brothers and sisters who are wholly or mainly dependant on such employee
• Any medical allowance shall be fully taxable.
• Expenditure on medical treatment by the employer may be by way of payment or
reimbursement – Circular No 603 dated 06-06-1991.
From the following data, you are required to calculate the perquisite value of the
expenditure on medical treatment, which is assessable in the hands of the employee of
a company, inclusive of the conditions to be satisfied:

Rs.
Gross total income Inclusive of salary 2,00,000
(1)Amount spent on treatment of the employee‟s wife in a hospital
maintained by the employer 10,000
(2)Amount paid by the employer on treatment of the employee ‟s child in a hospital 5,000
(3)Medical insurance premium reimbursed by the employer on a policy
Covering the employee, his wife and dependant parents. 8,000
(4)(a) Amount spent on medical treatment of the employee outside India 1,50,000
(b) Amount spent on travel and stay abroad 1,00,000
(5)Amount spent on travel and stay abroad of attendant 50,000
Solution:
Situation
(1) Amount spent on treatment of the employee‟s wife in a
hospital maintained by the employer
(2) Amount paid by the employer on treatment of the
employee‟s child in a hospital
(3) Medical insurance premium reimbursed by the employer on a
policy covering the employee, his wife and dependant parents.
(4 Amount spent onmedicaltreatment ofthe employee outside India
(5) Amount spent on travel and stay abroad
(6) Amount spent on travel and stay abroad of attendant
Tax implication
Not taxable
Not taxable as it does
not exceed Rs.15,000
Not taxable
Not taxable (note)
Not taxable (note)
Not taxable (note)
Note: It is assumed that the expenditure outside India is permitted by the Reserve Bank of India.
Also applicants gross totalincome does not exceed Rs 2 lacs.
Illustration 10
Mr Shenoy working for SDTV has a family which is, unfortunately, full of sick people. During
the year he received the following medical benefits from his employer:
• Reimbursement of medical expenses for treatment of his spouse: Rs 45,000. His spouse
suffered from chronic tuberculosis.
• His uncle (father‟s brother) was treated for renal failure at Apollo Hospital at a total outlay
of Rs 25,000. The entire sum was reimbursed by the employer .
• His father is an insulin dependant diabetic for whom a monthly sum of Rs 5,000 was
incurred for treatment. This sum was also reimbursed by the company. His father is a retired
service man drawing a monthly pension of Rs 1,500.
• His second son suffered from brain tumor for which treatment was available only at the
US. His son and his mother flew down to the US for the treatment and the total expenditure
incurred is as follows:
- Travel Rs 2 lacs
- Treatment Rs 4 lacs (RBI limit Rs 5 lacs)
- Stay Rs 2.55 lacs (RBI limit Rs 2.50 lacs)

• His sister who is unemployed – is suffering from Cancer. She was given treatment in a
hospital owned by SDTV. Cost of similar treatment elsewhere is Rs 4 lacs.
• His mother was treated in a Government hospital for arthritis and the entire cost of Rs 30,000
was borne by the employer. His mother is an IAS officer drawing 2 times his monthly salary.
Discuss the taxability of the above perquisites assuming his salary income
is: - Rs 1,00,000
- Rs 50,000
- Rs 95,000
Solution:
Medical Benefit Tax Incidence Value of Taxable
Perquisite
Reimbursement of Fully exempt: Treatment for a specified disease Nil
treatment expenses of
spouse for Tuberculosis
Reimbursement of Amount reimbursed will be fully taxable: Uncle Rs 25,000
expenditure incurred for is not a member of house hold for tax purposes
his uncle
Reimbursement of Exempt upto Rs 15,000 p.a while the balance is Rs 45,000
medical expenditure of fully taxable as a perquisite. (Rs 5,000*12 –
father Note: It is assumed that his father is fully Rs15,000)
dependant on Mr Shenoy. His pension is
considered as insufficient for his survival.
Treatment to Treatment for specified diseases to any member Nil
unemployed sister of household is fully exempt.
Note: Assumed that sister is fully dependant on
Shenoy
Treatment to mother Entire expenditure of Rs 30,000 is fully taxable Rs 30,000
as she is not dependant on the assessee.
Treatment for son Foreign treatment and stay expenses are exempt Rs 5,000
abroad to the extent permitted by RBI.
Treatment expenditure: Fully exempt
Stay Expenses : Rs 5,000 (2.55 lacs -2.5 lacs)
Value of Taxable perquisite excluding Foreign Travel Rs 1,05,000
Particulars Case 1 Case 2 Case 3
Salary Income apart from perquisites 1,00,000 50,000 95,000
Add Value of perquisite excluding foreign travel 1,05,000 1,05,000 1,05,000
Total 2,05,000 1,55,000 2,00,000
Add Foreign Travel Expenditure (Note) 2,00,000
Gross Salary 4,05,000 1,55,000 2,00,000
Taxability of Foreign Travel Expenditure for Medical Treatment

Note: Travel expenses of the patient together with one attendant are exempt provided gross total income
of the employee, before the inclusion of such travel expenditure as perquisite, does not exceed Rs 2 lacs.
Where gross totalincome exceeds Rs 2 lacs, the entire travel expenditure is fully taxable.
X Ltd., manufacturer of drugs and pharma products provides the following information
relating to payments made to its marketing manager during the previous year.
• Salary @ Rs. 20,000 per month.
• Motor-cycle purchased for Rs. 45,000 was given free of cost. The vehicle was used
for 2 years by the company.
• Conveyance allowance of Rs. 5,000 per month which was allowed to him. It is informed that the
entire sum is towards office reimbursements which are eligible for full exemption u/s 10(14).
as exempt under section
10(14).
• Tickets wor th Rs. 4000 for a cricket match between India and England.
• Reimbursement of medical expenses, incurred actually by him, of Rs. 17500.
The company asks you to compute the amount of income chargeable to tax in the hands
of marketing manager.
Solution
Computation of Taxable Salary
Salary @ Rs 20,000 pm 2,40,000
Add MotorCycle given free ofcost Note 1 36000
Conveyance Allowance Note 2 NIL
Tickets given free of cost Note 3 4,000
Reimbursement of Medical Expenses Note 4 2,500
Total Taxable Salary 2,82,500
Note
1 Since the motor cycle was given free of cost, the entire written down value i.e. Rs
45,000 less depreciation @ 10% per annum on straight line method being Rs 36,000,
shall be regarded as value of taxable perquisite.
2 Conveyance allowance is exempt to the extent spent. It is assumed that the entire
amount of Rs 5000 pm is spent by the employee.
3 Tickets given free of cost is regarded as an obligation of employee met by the
employer. Hence fully taxable. Conversely if the same had been given as a gift- it
would have been fully exempt since gifts upto Rs 5000 pa are not taxable.
4 Reimbursement of medical expenses is exempt upto Rs 15000 p.a. Hence the excess
of Rs 2500 is chargeable to tax.
3.4.5. Leave Travel Concession- Sec 10(5) read with Rule 2B
An employee is entitled to exemption under this section in respect of the value of travel
concession or assistance received or due to him from his present/former employer, for himself
and his family in connection with:
• Travel to any place in India while on service
• Travel to any place in India after retirement or termination of service.

The above exemption shall be subject to the following limits:
Mode ofJourney Maximum Amount Exempt
Air Economy air fare of the National Carrier of the shortest route to the
destination
Rail First class AC rail fare of the shortest route to the destination
Where the places Where a recognised public Where no recognised public transport
are not connected transport system exists: system exists:
by rail
1st class or deluxe class fare on 1st class AC rail fare for the distance of
such transport by the shortest journey by the shortest route as if the
route journey had been performed by rail
Frequency of claiming exemption:
• Twice in a block of 4 years:Assessee can claim the benefit of exemption in respect of any 2
journeys in a block of 4 calendaryears. The4 calendar year blocks are given as follows:
ƒ 1990-93
ƒ 1994-97
ƒ 1998-01
ƒ 2002-05
ƒ 2006-09
ƒ 2010-2013
• If the assessee has not availed the exemption of LTC in a par ticular block whether both or one of the
journeys, he can claim the exemption in the1st journey in the calendar year immediately succeeding
the end ofthe block.Assessee shallbe allowed exemption on two additionaljourneys in the block.
• An employer is under no statutory obligation to collect evidence to show that its employees
have actually utilized the amount paid towards leave travel concession or conveyance
allowance. It is adequate compliance if the employer has received a declaration from the
employee – CIT vs Larsen and Toubro Ltd (2009) 181 Taxman 71 (Supreme Court).
• Family for this purpose includes:
1. Spouse
2. Children subject to a maximum of two children
3. Parents, brothers and sisters who are wholly or mainly dependant on the assessee
• Where LTC is encashed without performing journey the entire amount received shall be taxable.
• It is not necessary that family members should under take the journey along with the employee.
• Exemption is available only in respect of Air/Rail/Road fare. Any boarding and lodging
expenses shall not qualify for exemption.
• Where a circular journey say Chennai – Hyderabad – Mumbai – Chennai is performed, the
maximum exemption shall be for the shor test route between the place of origin (Chennai) and
the far thest point reached (Mumbai).
The restriction of two children shall not apply in the following circumstances:
• Where the children were born prior to 1st
of October 1998, or
• In case of multiple bir ths after the first child i.e say twins after the 1st
child in which case all
the three children will be eligible for exemption u/s 10(5).

Illustration 11
Mr Khetan is working with Yatra.com as senior manager marketing. During the year he made
the following trips:
• Trip to Malaysia for official purposes. Total expenses incurred was Rs 50,000.
• Holiday trip to Kerala with his spouse and 3 children during April. Mr. Kethan had twins
after his first child. Total travel expenditure incurred per member was Rs 20,000. This sum
was entirely reimbursed by the company. The trip was by air and the entire family travelled
by executive class which is twice the price of economy fares.
• Trip to Kashmir on February with his spouse for vacation. Total travel expenditure of Rs
45,000 was fully reimbursed by the company. Journey was by air at applicable economy
fare. Discuss the tax implications.
Solution:
Trip Tax Implication
Trip to Malaysia for Not taxable in the hands of employee
official purposes.
Holiday trip to Kerala Rs 10,000 per member i.e Rs 50,000 (for 5 members) will be charged
with his spouse and 3 to taxation.
children during April Note: Journey by air is exempt only to the extent of economy airfare
of a national carrier. Any amount beyond this would be charged to
taxation. In this case since the cost of travel through business class is
twice the economy fare- 50% of the total fare is charged to taxation.
Trip to Kashmir on Fully exempt – Refer Note below
February 07 with his
spouse for vacation.
Note: Leave travel concession is exempt twice in a block of 4 calendar years. In this case the
assessee had undertaken 2 trips in the same previous year falling in 2 calendar years. It‟s the assessee
‟s option to claim both these trips as exempt or claim the benefit for any other trip in future. In this
case, it‟s assumed that the assessee has claimed the exemption for both the trips undertaken.
3.4.6. Valuation of Life Insurance Premium/ deferred annuity premium paid/
payable by the employer
• Premium paid by the employer is taxable on due basis
• Payment towards certain schemes like ESI, Fidelity guarantee scheme shall not be regarded as
perquisite as these are for the benefit of the employer.
3.4.7. Employee Stock Option Plans (ESOP)
This is one of the most important components of modern day salary structure. Recently we have seen
the ESOP component of a top honcho working for an MNC Energy Company in India breach the Rs
100 crore mark. Companies are using ESOPs as a popular tool to curtail employee attrition level and
increase loyalty. ESOPs are schemes where an employee receives shares in his employer company at
a price which is significantly lower than the prevailing market price. Let us

take a brief look into how this perquisite in charged in the hands of an employee - As amended
by notification no 94/2009 dated 18th December 2009:
Valuation of ESOPs: For the purpose of perquisite taxation, fair market value of the shares or
security on the exercise date shall be considered. Fair market value on exercise date shall be
computed in the following manner:
• In case ofshares listed in a recognised stock exchange:
Situation Share traded in only one Share traded in more than one recognized
recognized stock exchange stock exchange
Where the shares Average of opening and Average of opening price and closing price of
are traded in the closing price in the stock the share on the recognised stock exchange
exchange on the exchange on the date of which records the highest volume of trading
date of exercise exercise in the share on the date of exercise
Where no shares Closing price of the share Closing price of the share on a recognised
are traded in the on any recognised stock stock exchange,which records the highest
exchange on the exchange on a date closest volume of trading in such share, as on the
date of exercise to the date of exercising of date closest to the date of exercising of
the option and immediately the option and immediately preceding the
preceding the exercise date exercise date.
• In case of unlisted shares : Fair market value shall be such value of the share in the
company as determined by a merchant banker on:
- The exercise date, or
- Any date earlier than the date of the exercising of the option, not being a date
which is more than 180 days earlier than the date of the exercising.
In case any other security is given (other than shares):
The fair market value of any specified security, on the date on which the option is exercised by
the employee, shall be such value as determined by a merchant banker on the specified date.
For the purpose ofESOP computation, valuation on the date ofexercise is what is relevant.Any
information per taining to the value on the date ofvestingshallbe completely ignored in examinations.
Where the question gives you thevalue on the date ofvestingbut is silent on thevaluation on exercise
date,make an assumptionthatthe valuations on the date ofexercise and vesting are
the same and proceed.
Cost of acquisition of shares/ securities acquired in a scheme of ESOP shall be the fair market
value on exercise date – Sec 49(2AA).
IT ltd. under its Employees Stock Option Plan (ESOP) allotted 500 equity shares to its finance
manager, C on May 15, 2012 when she exercised her option The option was granted on January
15, 2011 and the shares vested with C on January 15, 2012. The company‟s shares are quoted in
Bombay Stock Exchange where the opening price and closing price of the date of exercise of
option on May 15, 2012 were Rs. 250 and Rs. 256 respectively Thecompany recovered Rs. 50
per share from C. Compute the taxable value of ESOP for the assessment year2013-14.

Computation of Value of Taxable Perquisite
Fair Market value of shares on Exercise Date 1,26,500
(Average of Rs 250 and Rs 256 for 500 shares)
Less Amount recovered from Mr C (Rs. 50 per share for 500 shares) 25,000
Value of taxable perquisite 1,01,500
3.4.8 Contribution to Approved Superannuation Fund
Any contribution by an employer to an approved superannuation fund shall be chargeable to tax to
the extent it exceeds Rs 1 lakh per annum. It is taxable in the year in which the contribution is made.
3.4.9 Contribution to an Approved Gratuity Fund
Any contribution by an employer to an approved gratuity fund is exempt from tax. Actual
payment received by the employee is exempt from tax within the limits specified u/s 10(10).
3.4.10 Value of any other benefit, amenity etc provided by the employer – Rule 3(7)(ix)
Any other benefit or perquisite provided by the employer shall be considered as a perquisite.
Actual expenditure incurred by the employer less amount recovered shall be considered as value
of taxable service.
3.5 Profits in Lieu of Salary- Sec 17(3)
Profits in lieu of salary refers to receipts from an employer which are rare, at times, non
recurring but are still regarded as income in the hands of the employee. Accordingly profits in
lieu of salary include:
i. Terminal compensation: Any amount due to or received by an employee, from his
employer or former employer at or in connection with the termination or modification of the
terms and conditions of employment.
ii. Balance in unrecognized welfare funds: Accumulated balance of employer‟s contribution
to unrecognized provident fund or unrecognized superannuation fund together with the
interest thereon shall be taxable on receipt.
These amounts are not taxed when the contribution is made by the employer. However interest
on employee‟s contribution is taxed as Income from Other Sources.
Employee‟s contribution to an unrecognized welfare fund shall not be taxable in the year of receipt/
maturity since this contribution is not eligible for deduction u/s 80C at the time of contribution.
iii. Payment under a Keyman Insurance Policy: Any payment under a Keyman insurance
policy including bonus thereon shall be taxable.
iv. Lump sum compensation: Any amount due to or received, whether in lump sum or
otherwise, by an assessee from any person:
• Before his joining any employment with that person, or
• After cessation of his employment with that person

As regards lump sum compensation is concerned, the amount need not necessarily be
received from an employer or former employer as the section uses the term “any
person”. Hence if this amount is received from any person other than an employer it
would still be taxable as salary, overriding the fundamental requirement of employer –
employee relationship mandated u/s 15.
Dearness relief received by a retired judge is 'profit in lieu of salary - Justice G.K.
Mathur vs.CIT [2012] 25 taxmann.com 507 (All.)
3.6 Retirement Benefits
3.6.1 Gratuity – Sec 10(10)
Gratuity received by an employee on retirement shall be chargeable as salary income to the
extent it is not exempt under this section. Gratuity received on the death of an employee by his
legal heirs shall not be taxable in the hands of the legal heirs. Exemption for Gratuity received
by an employee shall be classified as:
Employees Amount exempt
Government Employees Fully exempt
and employees of Local
authority – Sec 10(10)(i)
Exempt to the extent of least of the following :
− ActualGratuity Received
− 15/26*last drawn salary*No of Years
Other Employees (7/26*last drawn salary*No of Years - in the case of seasonal
covered by establishment)
Payment of Gratuity Act − Notified amount of Rs 10,00,000
1970 – Sec 10(10)(ii) Note:
No of Years = Completed years of service +
Part of the year in excess of 6 Months
Salary = Basic + D.A (full DA)
Exempt to the extent of least of the following :
− ActualGratuity Received
− 1/2*10months Avg salary*No of Years
− Notified amount of Rs.10,00,000
Other Employees not Note:
covered by No of Years = Fully Completed years of service
Payment of Gratuity Act Salary = Basic + D.A (forming part of retirement benefits)
1970– Sec 10(10)(iii) + Commission as a % of turnover
Average Salary till the month preceding the month of retirement.
For example if an employee retires on 15th of April his average
salary shall be computed for the period of 10 months ending on
31st of March i.e. from June 1st to March 31st.

In the case of employees who retire, become incapacitated, die or whose employment is
terminated on or after 24th
May 2010, the specified amount of gratuity exemption shall be
enhancedfromRs 3.5 lacs to Rs 10 lacs – Notification no 43/2010 dated 11.06.2010.
The limits given for non Government employees (both covered by Payment of Gratuity Act and
others)shall now stand enhanced to Rs 10 lacs effective 24.05.2010.
Where an employee receives salary from more than one employer, he can claim
exemption for both the sums received.
Maximum benefit cannot exceed Rs 3.50 lakhs during the life of an assessee,
though it may be claimed at different points of time.
In respect of Gratuity which is not exempt, an employee can claim relief u/s 89.
A lump sum payment made gratuitously or by way of compensation or otherwise to the widow or
other legal heirs of an employee, who dies while still in active service is not taxable – Circular No
573, dated August 21, 1990.
Ex gratia payment made from the Central Government, State Government, local authority or public
sector under taking to an employee or his legal heirs consequent upon injury to the person/ death of a
family member, while on duty shallnot be liable to income tax – Circular No 776 dated 8th
June 1999.
Where an employee retires from service before his actual tenure of service, he would still be able to claim
exemption u/s 10(10). It is has been clarified vide CBDT instruction F.No. 194/0/73 – IT dated 19-06-1973
that “termination of employment”would cover an employee who has resigned from the service.
For employees covered by Payment of Gratuity Act 1970:
1. In the case of piece rated employees – 15 days salary would be computed on the basis of average of
totalwages excluding overtime wages received fora period of3 months immediately preceding the
termination of his employment.
2. For seasonal establishments – 7 days salary shall be considered instead of 15 days salary ie the
formula shall be: 7/26*last drawn salary*No of Years
Illustration 12
Mr Gaurav is working for BPCL India Ltd for the past 25 years and 11months and 29 days.
During the previous year he decides to hang his boots. He retired from active service on 30th
November. Details of his last drawn salary are as follows:
- Basic Rs 15,000
- DA Rs 15,000
- HRA Rs 10,000
50% of his DA is taken for retirement benefits. Mr Gaurav does not stay in a house owned by
him- he however stays in an ancestral property with his father and brother for which no rent is
recovered from him. He received a sum of Rs 4.50 lacs on retirement. Compute his taxable
income assuming:
• He is a Government employee
• He is an employee covered by Payment of Gratuity Act
• He is an employee not covered by Payment of Gratuity Act

Solution:
Computation of Income under the head Salaries ofMr Gaurav
Case A Case B Case C
Basic (15,000*8) 1,20,000 1,20,000 1,20,000
Allowances
DA (15,000*8) 1,20,000 1,20,000 1,20,000
HRA (10,000*8) 80,000 80,000 80,000
Retirement Benefits
Gratuity 4,50,000 4,50,000 4,50,000
Exemption u/s 10(10) (Working Note 1) 4,50,000 4,50,000 2,81,250
Taxable Gratuity 0 0 1,68,750
Gross Salary 3,20,000 3,20,000 4,88,750
Note 1: Gratuity received by a Government employee is fully exempt.
Working Note 1
Case A: Government Employee
Actual Gratuity received is fully exempt from taxation
Case B:Covered by Payment ofGratuity Act
Exempted Gratuity will be the least of the following
Actual Gratuity 4,50,000
15/26* last drawn salary*no of years of service (WN 1A) 4,50,000
Notified Amount 10,00,000
Exempted Gratuity 4,50,000
Working Note 1A
15 days salary for no of years Salary: Basic + Full DA
= (15/26*30,000*26) = (Rs 15,000 + Rs 15,000)
= 4,50,000 = Rs 30,000
No of Years : Completed years + Part of a year in excess of 6 months
= 25 years + 1 year = 26 years
Case C: Not Covered by Payment ofGratuity Act
Exempted Gratuity will be the least of the following
Actual Gratuity 4,50,000
½* 10 months average salary*no of years of service (WN 1B) 2,81,250
Notified Amount 10,00,000
Exempted Gratuity 2,81,250
Working Note 1B
Salary: Basic + DA taken for retirement ie 50%
= (Rs 15,000 + Rs 15,000*50%) = Rs 22,500
Half month's salary for number of completed years
= (1/2*22,500*25) = Rs 2,81,250
No of Years : Completed years = 25 years

3.6.2 Pension- Sec 10(10A)
Pension as a retirement benefit can be in two forms, that which is received in lump sum
(commuted pension) and those which are received in periodic installments (uncommuted
pension). Provisions dealing with exemptions pertaining to pension are summarized below:
• Uncommuted Pension (periodic payments): Fully taxable in the case of both Government
and Non Government employees.
• Commuted Pension (Lump sum) is exempt as follows:
Employee Amount Exempt
Employees of State and Central Fully Exempt
Government, local authority and
statutory corporation – Sec 10(10A)(i)
If Gratuity is received If no Gratuity is received
Any other employee – Sec 10(10A)(ii) with Pension with Pension
1/3 of Full value of 1/2 of Full value of
commuted pension commuted pension
– In respect of pension which is not exempt – an employee can claim relief u/s 89.
– Full Value of Pension: Pension received on Commutation
Percentage of Commutation
– Judges of High Cour t and Supreme Cour t will be entitled to the exemption of commuted por
tion u/s 10(10A)(i) – Circular No 623 dated 6-1-1992.
– Pension is chargeable to tax on accrual basis irrespective of whether it is vo luntary or under a contract.
Arrears of pension are also chargeable on due basis irrespective of whether it is paid or not – T.A.
Ramasubramaniam vs CIT (1975) 100 ITR 408 (Mad).
Illustration 13
Mr Rajiv, an employee of NTC Ltd retired from active employment on 1st of April. On retirement he
received a lump sum pension of Rs 5 lacs for 40% of his total pension and decides to receive the
balance as monthly sums of Rs 20,000. Compute his taxable pension for the year assuming:
• He is a non Government employee and receives gratuity with pension.
• He is a non Government employee and does not receive gratuity with pension.
Solution:
Particulars Case A Case B Case C
Uncommuted Pension (20,000*12) 2,40,000 2,40,000 2,40,000
Commuted Pension 5,00,000 5,00,000 5,00,000
Less Exemption u/s 10(10A)- WN 1 5,00,000 4,16,667 5,00,000
Taxable Commuted pension 0 83,333 0
Total Taxable pension 2,40,000 3,23,333 2,40,000

Working Note 1
Particulars Case A Case B Case C
Situation Government Pension with Pension without
employee Gratuity Gratuity
Exemption u/s 10(10A) Fully Exempt 1/3 of Full value 1/2 of Full value
of Commuted of Commuted
pension pension
Total Exemption 5,00,000 4,16,667 6,25,000
Working Note 1 A
Commuted Pension received 5,00,000
% of commutation 40%
Full value of commuted pension 12,50,000
(Pension received/% of commutation)
3.6.3 Leave Salary – Sec 10(10AA): Leave salary denotes salary paid to an employee for
encashment of unavailed leave eligible as per regular norms of the employer. For example, if an
employee is eligible for 20 days of leave per year as per the norms of the employer and he avails
only 15 days of leave during the year, he may be eligible for encashment of the unavailed leave
of 5 days. This encashment is termed as leave salary.
• Encashment of leave during service is fully taxable in the case of all employees. However
relief u/s 89 read with Rule 21(A) shall be available to the employee – Circular No 431
dated 12th September 1985.
• Encashment of accumulated leave at the time of retirement or otherwise– Sec 10(10AA)
shall be exempt as follows:
Employees Amount exempt
Central and State Gov- Fully exempt u/s 10(10AA)(i)
ernment Employees
Any other employee Leave shall be exempt to the extent of least of the following (10(10AA)(ii):
• Actual Leave encashment received
• 10 * Average salary
• Rs 3,00,000 (Amount specified by Government)
• Cash equivalent to unavailed leave subject to a maximum of 30 days
leave per completed year of service. This shall be computed on the
basis of average salary.
Note: Salary = Basic + D.A (forming part of salary for
retirement benefits) + Commission as a % of turnover
Average salary from the date ofretirement till 10 months preceding
that date.
Average salary = Salary for the period of 10 months immediately
preceding the retirement date
10

• The provisions of Sec 10(10AA) shall be attracted at the time of “retirement or
otherwise”. The term “otherwise” covers the case of retirement which takes place not at
the time of superannuation but anyothertime like resignation,voluntary retirement etc.–
CIT vs R.J.Shahney (1986) 159 ITR 160(MAD).
• Leave salary received by the family of a government servant, who died in service, is not taxable
in the hands of the recipient – Circular No 309 dated 3-7-1981.
• Dearness allowance shall be considered as par t of salary only when it is taken for calculation of all
retirement benefits. Where DA is considered for only few of the retirement benefits, it shall not be taken
for the purposesofcomputing exemption – ITO vs Sr Accounts Officer,Pay & Accounts, DHBVNL
(2009) 33 SOT 37 (Del).
• Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit
of such employee at the time of his/her death is an ex gratia payment on compassionate grounds in the
nature of gifts. Thus the payment is not in the nature of salary – Letter No 35/165 dated 5-11-1965.
• Where an employee receives salary from more than one employer, he can claim exemption for
both the sums received.
• The assessee can claim relief u/s 89 in respect of leave encashment.
• Maximum benefit cannot exceed Rs 3.00 lakhs during the life of an assessee,though it
may be claimed at different points of time.
Computation of “Cash equivalent to unavailed leave”:
i. Determine the total number of completed years (ignore
fraction)
ii. Compute Step i* 30 days
iii.Compute unavailed leave = Step ii (-) leave taken during service
iv.Determine unavailed leave as per employer norms (shall be given in the question)
v. Determine eligible unavailed leave to be the lower of step iii or step iv
vi.Compute cash equivalent to unavailed leave = step v*average salary / 30
The total leave eligibility per year cannot exceed 30 days per completed year of service. Sometimes
in the exam you may be given total leave taken for the whole tenor and unavailed leave. In such
cases follow the method adopted in illustration 14 below.
Illustration 14
Mr Jones, retired from active service after having worked for 23 years and 11 months in
Hindalco. Upon retirement, along with other benefits he received a leave encashment of Rs 4
lacs for his unavailed leave of 400 days. He has availed a total of 240 days of leave during his
tenor. His last drawn basic was Rs 10,000 and DA (fully taken for retirement) was Rs 5,000.
Compute the taxable leave salary assuming:
• Non Government employee
• He is a Non Government employee and his unavailed leave is 500 days

Solution:
Case A: Government employee
Leave salary is fully exempt for Government employees
Case B:Non Government employee
Leave Salary Received 4,00,000
Less Exemption u/s 10(10AA) WN 1 1,50,000
Taxable Leave Salary 2,50,000
Working Note 1 Computation ofExempted leave salary
Least of the following will be exempt as follows:
Actual Leave Salary 4,00,000
10 months salary - WN 1A 1,50,000
Notified amount 3,00,000
Cash equivalent to unavailed leave subject to a maximum of 2,00,000
30 days for every completed year of service - WN 1B
Exempted Leave Salary (least of the above) 1,50,000
Working Note 1 A
10 months salary (Rs 15,000*10) 1,50,000
Working Note 1 B
Number of completed years of service 23
Maximum leave for every completed year 30
Total eligible leave 690
Less Leave Taken during service 240
Maximum permissible unavailed leave 450
Unavailed leave as per employer norms 400
Unavailed leave considered for exemption purposes 400
(lower of the two above)
Number of months (unavailed leave/30) 13.3
Unavailed leave salary @ Rs 15,000 p.m 2,00,000
Case C: Non Government employee - 500 days unavailed leave
Leave Salary Received 4,00,000
Less Exemption u/s 10(10AA) WN 2 1,50,000
Taxable Leave Salary 2,50,000
Working Note 2 : Exempted leave salary
Least of the following will be exempt as follows:
Actual Leave Salary 4,00,000
10 months salary - WN 2A 1,50,000
Notified amount 3,00,000
Cash equivalent to unavailed leave subject to a maximum of 2,25,000
30 days for every completed year of service - WN 2B
Exempted Leave Salary (least of the above) 1,50,000

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