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Exemption of Amounts Specified in the Income Tax Rules in Calculating 'Salary' Income

1. Prescribed Special Allowances which are Exempt to a certain extent - Section 10(14)

(i) Special Allowances for performance of official duties:

These allowances are not in the nature of a perquisite within the meaning of section 17(2) and are specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or employment of profit. These allowances will be exempt the extent such expenses are actually incurred for that purpose. [Section 10(14)(i)].

These allowances are:

  1. Travelling allowance:

  2. Any allowance granted to meet the cost of travel on tour or on transfer of duty. "Allowance granted to meet the cost of travel on transfer" includes any sum paid in connection with transfer, packing and transportation of personal effects on such transfer.

  3. Daily allowance:

  4. Any allowance, whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty;

  5. Conveyance allowance:

  6. Any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit, provided that free conveyance is not provided by the employer. Expenditure incurred on journey from residence to office and back to residence shall not be treated as expenditure incurred on conveyance in performance of official duties;

  7. Helper allowance:

  8. Any allowance, by whatever name called, granted to meet the expenditure incurred on a helper where such helper is engaged for the performance of the duties of an office or employment of profit;

  9. Academic allowance:

  10. Any allowance, by whatever name called, granted for encouraging academic, research and training pursuits in educational and research institutions;

  11. Uniform allowance:

    Any allowance, by whatever name called, granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit.

The above allowances shall be exempt to the extent of minimum of the following:

  1. Actual allowance received.
  2. Actual amount spent for the purposes of duties of office or employment.

(ii) Allowances to meet Personal Expenses

These allowances can be of the following two types:

1. Allowances which are exempt to the extent of amount received or the limit specified, whichever is less:

  1. Children education allowance:

  2. Exempt upto actual amount received per child or ₹100 p.m. per child upto a maximum of 2 children, whichever is less.

  3. Hostel expenditure allowance:

  4. Exempt upto actual amount received per child or ₹300 p.m. per child upto a maximum of two children, whichever is less.

  5. Tribal area, Scheduled Area/Agency area allowance:

  6. Exempt upto actual amount received or ₹200 per month, whichever is less.

  7. Special compensatory hilly area allowance or high altitude allowance etc.:

  8. Exemption varies from ₹300 to ₹7,000 per month.

  9. Border area, remote area allowance, disturbed area allowance, etc.: (as per given later):

  10. Exemption varies from ₹200 p.m. to ₹1,300 p.m.

  11. Compensatory field area allowance:

  12. Exempt to the extent of ₹2,600 p.m.

  13. Compensatory, modified field area allowance:

  14. Exempt to the extent of ₹1,000 p.m.

  15. Counter insurgency allowance granted to members of armed forces:

  16. Exempt to the extent of ₹3,900 p.m.

  17. Transport allowance:

  18. Any transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty, to the extent of ₹1,600 per month.

    However, such transport allowance granted to an employee, who is blind or deaf and dumb or orthopaedically handicapped with disability of lower extremities, is exempt to the extent of ₹3,200 p.m. instead of ₹1,600.

  19. Underground allowance:

  20. Any underground allowance granted to an employee who is working in uncongenial, unnatural climate in underground mines shall be exempt to the extent of ₹800 p.m.

  21. High altitude (uncongenial climate) allowance:

  22. Given to the member of the armed forces for altitude of 9000 ft to 15000 ft ₹1,060 p.m. and for altitude above 15000 ft ₹1,600 p.m.

  23. Special compensatory highly active field area allowance granted to members of armed forces:

  24. Exempt to the extent of ₹4,200 p.m.

  25. Island (duty) allowance:

    Given to the member of the armed forces in the Andaman & Nicobar and Lakshadweep Group of Islands exempt to the extent of ₹3,250 p.m.

Note :

(1) Assessee claiming exemption of allowance mentioned under clauses (f) and (g) above shall not be entitled to the exemption in respect of allowance referred to under clause (e) above.

(2) Assessee claiming exemption in respect of the allowance mentioned under clause (h) above shall not be entitled to the exemption in respect of disturbed area allowance mentioned under clause (e) above.

(3) It may be noted that allowances mentioned in para 4.13b above are exempt to the extent of amount received or the limit specified, whichever is less. Actual expenditure in this case has no relevance. E.g. if an employee receives ₹2,000 p.m. as transport allowance for commuting between the place of residence and the place of duty and actually spends ₹1,200 p.m. for this purpose, the exemption, in this case shall be ₹1,600 p.m. although the amount actually spent was ₹1,200 p.m.

 

2. Allowance which is exempt to the extent of certain percentage of amount received

Allowance allowed to transport employees working in any transport system:

If any fixed allowance is given by the employer to the employee who is working in any transport system, to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another,

  • the amount of exemption shall be 70% of such allowance or
  • ₹10,000 p.m.,
    • whichever is less.

Note : Exemption will be allowed to the transport employees only when they are not in receipt of daily allowance.

 

2. Exemption of Death-Cum-Retirement Gratuity [Section 10(10)]

Gratuity is a payment made by the employer to an employee in appreciation of the past services rendered by the employee. Gratuity can either be received by:

  1. the employee himself at the time of his retirement; or

  2. the legal heir on the event of the death of the employee.

Gratuity received by an employee on his retirement is taxable under the head "Salary" whereas gratuity received by the legal heir of the deceased employee shall be taxable under the head "Income from other sources".

However, in both the above cases, according to section 10(10) gratuity is exempt upto a certain limit. Therefore, in case gratuity is received by employee, salary would include only that part of the gratuity which is not exempt under section 10(10) as discussed in the Table below :

Government employees & employees of local authority

Employees covered under Gratuity Act. Any other Employees
Fully Exempt

Minimum of the following 3 limits:

  1. Actual gratuity received, or

  2. 15 days salary for every completed year, or part thereof exceeding 6 months 7 days salary for each season in case of employee in seasonal establishment; or

  3. ₹. 10,00,000

Meaning of Salary:

  1. Basic salary plus dearness allowance.

  2. Last drawn salary. Average salary for preceding 3 months in case of piece rates employees

  3. No. of days in a month to be taken as 26

Minimum of the following 3 limits:

  1. Actual gratuity received

  2. Half months average salary of each completed year of service.

  3. ₹. 10,00,000

Meaning of Salary:

  1. Basic Salary plus D.A. to the extent the terms of employment so provide Commission, if fixed percentage of turnover.

  2. Average salary of last 10 months preceding the month in which event occurs.

  3. Only completed year of service is to be taken.

Important Points :

  1. Where an employee had received gratuity in any earlier year(s) and had claimed exemptions under section 10(10) in respect of the gratuity received earlier also, he will still be entitled to this exemption but the limit which at present is Rs. 10,00,000 shall be reduced by the amount of exemption(s) availed in the earlier year(s). There will be no change in the other two limits.

  2. The words "completed service" occurring in section 10(10) should be interpreted to mean an employee's total service under different employers including the employer other than the one from whose service he retired, for the purpose of calculation of period of years of his completed service, provided he was not paid gratuity by the former employer.

  3. Any gratuity paid to an employee, while he continues to remain in service with the same employer is taxable under the head "Salaries" because gratuity is exempt only on retirement or on his becoming incapacitated or on termination of his employment or death of the employee. In this case, however the assessee can claim relief under section 89.

  4. The expression "termination of employment" would cover an employee who has resigned from the service.
  5. How to determine 15 days’ salary -
  6. Salary of 15 days is calculated by dividing salary last drawn by 26, i.e., maximum number of working days in a month. For instance, if monthly salary at the time of retirement is Rs. 2,500, 15 days’ salary would come to Rs. 1,442.31 [i.e., Rs. 2,500 × 15÷26].

  7. How to determine 15 days’ salary for each year of service in the case of a piece-rated employee -

    In the case of a piecerated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the retirement. For this purpose, the wages paid for any overtime work shall not be taken into account.

3. Leave Encashment [Section-10(10AA)] for Computing Salary Income

As per terms of employment, generally, an employee is granted certain period of leave(s) on yearly basis. Such leave(s) may be casual leaves, medical leaves and privileged leaves or earned leaves. Generally, an employee can accumulates his medical leaves and privileged leaves and can avail such leaves in subsequent years as per his necessity.

However, in some cases, an employee can even encash his accumulated privileged/earned leaves and can get salary for the said period of leave. Such receipt of salary by an employee from his employer in lieu of his accumulated leaves is called “Leave Encashment”.

Such encashment can be done by an employee either during the service or at the time of leaving job due to retirement or any other reason. However, in case of death of an employee, the salary for his/her accumulated leave is given to his/her legal heirs.
Tax Treatment of Leave Encashment

(A) Leave Encashment during service.

Any encashment of leaves by an employee during continuance of service is “fully taxable” for all employees whether government employees or non- government employees. Such encashment may either be of current year leaves or of past accumulated leaves. It is taxable as salary income of the employee for the previous year in which amount is received by employee.

(B) Leave Encashment on Leaving Job / Retirement

(BI)        For Government Employees [Section 10(10AA)(i)].

Any payment received as leave encashment at the time of retirement or on leaving job otherwise shall be “Fully Exempt” u/s 10(10AA)(i).

Meaiuing of Government Employee. Government employee includes

  1. Employees of Central Government

  2. Employees of state Government

Note : Employees of Local Authority, Statutory Corporation and Public Sector Undertakings are not regarded as Government Employees for this purpose.

Leave Encashment [Section-10(10AA)] for Computing Salary Income

(BII) For Non-Government Employees [Section 10(10AA)(ii)].

Any payment received as leave encashment at the time of retirement or on leaving job otherwise shall be exempt upto the least of following amounts Under Section 10 (10AA)(ii).

Minimum of the following four limits:

  1. Leave encashment actually received; or

  2. 10 months average salary; or

  3. Cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave for every year of actual service rendered; or

  4. Rs. 3,00,000

Meaning of salary :

  1. Basic salary plus D.A. to the extent the terms of employment so provide plus Commission, if fixed percentage of turnover.
  2. Average salary of last 10 months immediately proceeding the date of retirement.

C.       Leave Encashment after Death.

In case the amount of leave encashment is given to legal heirs of deceased employee, it will be Fully Exempt.

Important Notes:

  1. Meaning of Non-Government Employees. Non-government employees includes all employees other than employees of Central Government and State Government.

  2. Meaning of Salary. It shall mean Basic Salary, Dearness Allowance (if given under the terms of employment or if it enters into pay for retirement benefits) and commission as fixed percentage of turnover achieved by him. Then,

    Salary = Basic Salary + D.A. (enters)/D.P + Commission on Turnover

  3. Calculation of Average Salary of 10 months. Average salary of 10 months is to be calculated on the basis of the average salary drawn by the employee during the period of 10 months immediately preceeding his retirement whether on superannuation or otherwise.

    Example 1: If employee retires on December 31, 2013 then average salary of 10 months will be calculated by taking salary drawn during March 1, 2013 to December 31, 2013:

    Example 2 : If employee retires on December 15, 2013 then average salary of 10 months will be calculated by taking salary drawn during the period March 16, 2013 to December 15, 2013.


  4. Meaning of Approved Period of Leave : Approved Period of Leave = 30 days/ 1 month leave for every completed year of service. Note. Service period in fraction of the year (whatsoever it may be) shall be ignored, i.e., shall not be taken into consideration while calculating total approved period of leave on the basis of service period.

  5. Earning of Approved leave(s) left on leaving job

    It shall be calculated as follows : 
    The approved leave(s) on the basis of completed year of service = x x x x 
    Less : Leave(s) taken during service = x x x x  
    Less : Leave(s) encashed during service = x x x x
    Approved leave(s) left on leaving job = x x x x


  6. Whole life exemption limit. The notified maximum exemption limit of Rs. 3,00,000 is a whole life exemption limit for an employee in respect of leave encashment received at the time of leaving job. It can be explained as follows :

    1. If employee receives leave encashment for the 1st time in his life at the time of leaving job:

      While calculating exemption, the maximum notified limit of Rs. 3,00,000 shall be applicable and he shall be granted exemption as per the least of 4 limits.


    2. If employee receives leave encashment for the second/third or subsequent times:

      While calculating exemption in respect of leave encashment on subsequent occasions, the maximum notified exemption limit shall be reduced by the exemption claimed in the past.


  7. Receipt of leave encashment simultaneously from two or more employers in same P.Y.

  8. In such a case, the maximum exemption in respect of leave encashment received from all the employers cannot exceed the maximum notified limit of Rs. 3,00,000.

  9. Relief u/s 89(1). In respect of taxable leave encashment included in salary income of any previous year, the employee is entitled to claim relief u/s 89(1).

4. Valuation of Leave Travel Concession or Assistance (LTC/LTA) in India. [Section 10(5) & 10(6)(i)]

The employee is entitled to exemption under section 10(5) in respect of the value of travel concession or assistance received by or due to him from his employer or former employer for himself and his family, in connection with his proceeding—

  1. on leave to any place in India.
  2. to any place in India after retirement from service or after the termination of his service.

The exemption shall be allowed subject to the following

Different Situations Amount of Exemption if journey is performed on or after 1,1997
  • Where journey is performed by AIR
  1. Amount of air economy class fare of the National Carrier by the shortest route; or
  2. the amount spent,

whichever is less

  • Where journey is performed by RAIL
  1. Amount of air-conditioned first class rail fare by the shortest route; or
  2. the amount spent,

whichever is less

  • Where the places of origin of journey and destination are connected by Rail and journey is performed by any other mode of Transport
  1. Amount of air-conditioned first class rail fare by the shortest route; or
  2. the amount spent

whichever is less

  • Where the places of origin of journey and destination (or part thereof) are not connected by RAIL
 
    • Where a recognised public transport system exists
  1. First class or deluxe class fare by the shortest route; or
  2. the amount spent,

whichever is less.

    • Where No recognised public transport system exists
  1. Air-conditioned first class rail fare by the shortest route (as if the journey had been performed by rail); or
  2. the amount actually spent,

whichever is less.

One should also keep in view the following Points— 

1. Meaning of “Family” -

  • For this purpose, “family” includes spouse and children of the employee. It also includes parents, brothers and sisters of the employee, who are wholly or mainly dependent upon the employee.

  • However, family does not include more than two surviving children of an individual born on or after October 1, 1998

2. Only 2 journeys in a Block of 4 years is Exempt -

Exemption on the aforesaid basis is available in respect of 2 journeys performed in a block of four calendar years commencing from 1986.

3.  “Carry-over” Concession -

If an assessee has not availed travel concession or assistance during any of the specified four-year block periods , exemption can be claimed in the first calendar year of the next block (but in respect of only one journey). This is known as “carry over concession”.

4. Exemption is based upon Actual Expenditure -

The quantum of exemption is limited to the actual expenses incurred on the journey. In other words, without performing any journey and incurring expenses thereon, no exemption can be claimed. 

5. Exemption is available in respect of Fare -

The exemption is strictly limited to expenses on air fare, rail fare, bus fare only. No other expenses, like scooter or taxi charges at both ends, porterage expenses during the journey and lodging/boarding expenses will qualify for exemption. 

6. Exemption is available in respect of Shortest Route -

Where the journey is performed by a circuitous route, the exemption is limited to what is admissible by the shortest route. 

7. Fixed allowance is not subject to Exemption -

Fixed sum paid to employees by way of leave travel allowance on basis of self-declaration made by employees would not be exempt under section 10(5)—

8. Family Member Travelling Separately -

Exemption shall not be available if the family members are travelling separately without the employee who is not on leave.

 

5. Tax treatment of PENSION [Monthly and Commuted] for Computing Salary Income [Section 17(1)(ii)]

Pension is a payment made by the employer after the retirement/death of the employee as a reward for past service.

Pension is normally paid as a periodical payment on monthly basis but certain employers may also allow an employee to forgo a portion of the pension and receive a lump sum amount by surrendering such portion of pension. This is known as commutation of pension. The pension may be fully or partly commuted i.e. in lieu of the pension, a lump sum payment is made to the employee. The treatment of these two kinds of pension is as under:

  • Uncommuted pension i.e. the periodical pension: It is fully taxable in the hands of all employees, whether government or non-government.
  • For instance, X gets monthly pension of Rs. 2,000. It is taxable as salary under section 15 in the hands of a Government employee as well as nonGovernment employee.

  • Commuted pension: Exemption of Commuted Pension U/s 10(10A)
Status of Employee

Gratuity Received / Not Received

Exemption in respect of Commuted Pension under Section 10(10A)
Govt. employees, employees of local authorities and employees of statutory corporations Gratuity may or may not be Received Entire Commuted Pension is Exempt from Tax.
Non-Government Emplopyee Gratuity Received

1/3 rd of the Pension which he is normally entitled to receive is Exempt from tax.

Non-Government Emplopyee Gratuity is Not Received

1/2 of the Pension which he is normally entitled to receive is Exempt from tax.

If payment in Commutation of Pension received by an employee exceeds the aforesaid limits, such excess is liable to tax in the assessment year relevant to the previous year in which it is due or paid. The assessee can, however, claim relief in terms of section 89.

 

Note :

  1. Pension received by the employee is taxable under the head "Salaries".

  2. Pension is received from UNO by the employee or his family members : It is not chargeable to tax

  3. Family pension received by the family members of armed forces : It is exempt under section 10(19) in some cases.

  4. Family pension received by the family members after the death of an employee : It is taxable in the hands of recipients under section 56 under the head “Income from other sources”. Standard deduction is available under section 57 which is 1/3 of such pension or Rs. 15,000, whichever is lower.

 

6. Valuation of Rent Free Unfurnished & Furnished Accomodation [Rule 3(1)]

1. Rent-Free Un-Furnished Accommodation

For the purpose of valuation of the perquisite in respect of unfurnished accommodation, employees are divided in the following two categories:

CASE-1 : Central and State Government Employees

CASE-2 : Private Sector Employees or Other Employees.

CASE-1 : Central and State Government Employees

Basis of Valuation of Perquisites-

The value of perquisite in respect of accommodation provided to such employee is equal to the licence fee which would have been determined by the Central or State Government in accordance with the rules framed by the Government for allotment of houses to its officers.

Exception (Exempt from Tax)-

  • Rent-Free official residence provided to a Judge of a High Court or to a Judge of the Supreme Court is exempt from tax.

  • Rent-Free official residence provided to an official of Parliament, a Union Minister, a Leader of Opposition in Parliament and serving Chairman/members of UPSC is exempt from tax

Category of Employees -

  • includes Central Government employees and State Government employees.

  • includes those Central Government employees and State Government employees who are on deputation to a public sector undertaking but the accommodation is provided by the Central Government or State Government.

Exempted Perquisites

CASE-2 : Private Sector Employees or Other Employees.

In this category, value of the perquisite in respect of rent-free accommodation depends on salary of the employee and lease rent of the accommodation.

Basis of Valuation of Perquisites-

Population of city as per 2001 census where accommodation is provided

Where the accommodation is owned by the employer Where the accommodation is taken on lease or rent by the employer
If Populations > 25 Lakh

15% of Salary in respect of the period during which the accommodation is occupied by the employee

a. 15% of Salary ; or

b. Lease Rent ( paid or payable) by Employer,

whichever is Less

If Populations > 10 lakh but <= 25 lakh 10% of Salary in respect of the period during which the accommodation is occupied by the employee
Any other 7.5 % of Salary in respect of the period during which the accommodation is occupied by the employee

Salary - How to Calculate :

- Salary Includes ...

  1. basic salary;
  2. dearness allowance/pay, if terms of employment so provide;
  3. bonus;
  4. commission;
  5. fees;
  6. all other taxable allowances (excluding amount not taxable); and
  7. any monetary payment which is chargeable to tax (by whatever name called).

- Salary Does Not Includes ...

  1. dearness allowance/pay, if not taken into account while calculating retirement benefits, like provident fund, gratuity, etc., or if term of employment does not so provide;
  2. employer’s contribution to provident fund account of an employee;
  3. all allowances which are exempt from tax;
  4. value of perquisites [under section 17(2)]; and
  5. lump-sum payments received at the time of termination of service or superannuation or voluntary retirement, like gratuity, severance pay leave encashment, voluntary retrenchment benefits, commutation of pension and similar payments.

Important Points :

  1. “Salary” shall be determined on “accrual” basis - In other words, salary accrued for the period during which rent-free accommodation is occupied by the employee will be considered, whether it is received during the previous year or not.

  2. Salary from two or more employers - Salary from all employers in respect of the period during which an accommodation is provided will be taken into consideration.

  3. Monetary payments v. Perquisites - Consider the following monetary payments —

    • - Payments of gas, electricity, water and income-tax bills [being perquisites under section 17(2)(iii)/(iv)] are not taken into consideration.

    • - Overtime payment (it is not a perquisite) is taken into consideration.

2. Rent-Free Furnished Accommodation

The perquisite in respect of rent-free furnished accommodation may be provided in the following two different ways —

1. A Furnished Accommodation (not being in a Hotel, Motel, Service Apartment or Guest House) -

Value of the perquisite shall be calculated as follows —

  • Step 1 - Find out value of the perquisite on the assumption that the accommodation is unfurnished

  • Step 2 - To the value so arrived at, add value of furniture.

Value of furniture for this purpose is as follows—

  1. 10% per annum of the original cost of furniture, if furniture is owned by the employer;

  2. actual hire charges payable (whether paid or payable), if furniture is hired by the employer.

Meaning of furniture - “Furniture” here includes radio sets, television sets, refrigerators, air-conditioners and other household appliances.

2. A Furnished Accommodation in a Hotel, Motel, Service Apartment or Guest House -

The value of the perquisite is determined on the basis of lower of the following two —

  1. 24% of “salary” paid or payable for the period during which such accommodation is provided in the previous year.

  2. Actual charges paid or payable by the employer to such hotel.

Exception -

If an accommodation is provided in a hotel, motel, service apartment or guest house in the case of relocation of an employee from one place to another place, nothing is chargeable to tax for 15 days (in aggregate during the financial year).

3. Valuation of Accommodation provided at Concessional Rent

If an accommodation is provided to an employee at concessional rent, the valuation should be made as follows (these rules are applicable whether the accommodation is furnished or unfurnished or it is provided in a hotel) —

Step-1 : Find out the value of the perquisite on the assumption that no rent is charged by the employer

Step-2 : From the value so arrived at, deduct the rent charged by the employer from the employee.

The balance amount (if it is positive) is the taxable value of the perquisite in respect of concession in rent.

 Important Links....for calculating Salary Income

(A). Salary -Definition & Meaning
(B). Provident Fund
(C). Allowance
(D). Perquisites
(E). Profit in lieu of Salaly
(F). Retirement Benefits
(G). Deductions
(H). Table Presentation of Salary Income (Section 15 to 17)
 
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