TAXATION – FY 2022-23 – Intermediate

CA - Intermediate

VOLUME - 1

INCOME TAX

FY 2022-23
AY 2023-24

CONSOLIDATED HANDOUTS FOR

CLASSROOM DISCUSSION
(Relevant for students appearing in May and November 2023
examinations)

COMPILED
BY

CA VIJAY RAJA

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 TAXATION – FY 2022-23 – Intermediate
INDEX
Sl Particulars Page no Weightage of Marks
no
% Marks
1 Introduction to IT, definitions & rates of tax 3 15%-20% 8-10
2 Residential status and Scope of Income 19
3 Incomes which do not form part of Total Income 27 20%-30% 10-15
4 Salaries 30
5 Income from House Property 57
6 Profits and Gains of Business or Profession 68
7 Capital Gains 109
8 Income from Other Sources 136
9 Clubbing Of Income 151 15%-20% 8-10
10 Set Off and Carry Forward of Losses 158
11 Deductions under Chapter VIA 166
12 Alternative Minimum Tax 195
13 Problems on Total Income 200 20%-25% 10-13
14 Advance payment of tax 213 15%-20% 8-10
15 Tax deducted at source (TDS) 218
16 Income Tax Authorities & Filing of Return of 239
Income
17 Goods & Service Tax (GST)

Pattern of Exam Question Paper: Questions 1-8 [MCQ 30 marks + Descriptive 70 marks]

1. The question paper will have two sections:

Section A – Income Tax for 60 marks [18+42]
Section B – GST for 40 marks [12+28]
Students should write in two separate answer books – Marked ‘A’ for DT &
marked ‘B’ for IDT.
The paper will be considered as a single paper for purpose of passing.

2. MCQ would be for 30 Marks. It would be of 1 or more marks.

There will be no negative marking. Income tax for 18 marks & GST for 12 marks.
There will be 2 types of MCQ (a) Independent MCQ (b) Integrated Case Scenario
based MCQ ( 5 or 6 MCQ based on case scenario of one or two pages)

3. Descriptive would be for 70 marks - General Pattern is:

Section A - Question 1 is compulsory and any 2 from question number 2-4 [14
marks each (14x3=42). Further the 14 marks can be (14), (7+7), (6+4+4),
(5+5+4) etc
Section B – comprises of questions 5-8. Question 5 is compulsory for 8 marks
and any 2 questions from question 6-8 of 10 marks each. Each of the main
questions can be further divided into sub-questions of 4/5/6 marks each.

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TAXATION – FY 2022-23 – Intermediate
CHAPTER -1
INCOME TAX ACT, 1961
(298 Sections)
Taxation History
The Income Tax Act, 1961 has been brought into force with effect from 01.04.1962. It applies
to the whole of India.

Revenue of Government
The government needs money to maintain law & order in the country, safeguard the security
of the country from foreign powers and promote the welfare of the people.

Q: What is the scope of the Income-tax Act, 1961?

Ans: The provisions of income tax are contained in the Income-tax Act, 1961 which extends
to the whole of India and became effective from 1-4-1962 [section 1].

The Income-tax Act contains provisions for:

1. Determination of taxable income, [5 Heads of Income]
2. Determination of tax liability,
3. Procedure for assessment,
4. Appeals,
5. Penalties and prosecutions.
6. It also lays down the power and duties of various income tax authorities.

To understand the income tax law, what does one need to study?
Ans: An understanding of the income tax law requires a study of the following:
1. The Income-tax Act, 1961 (amended up-to-date).
2. The Income-tax Rules, 1962 (amended up-to-date).
3. Notifications, Circulars, clarifications issued from time to time by the CBDT.
4. Annual finance Act (Budget)
5. Judicial decisions or case laws – [Note – Case laws, are however, dealt with only at
the Final level and not at the Intermediate (IPC) level.]

Q: What is a Finance Bill and when does the Finance Bill become the Finance Act?

Ans: Every year a Finance Bill will be passed in the parliament. The Finance Bill gives
effect to the financial proposal of the Central Government for the financial year. When the
Finance Bill is approved by both the Houses of Parliament and receives the assent of the
President, it becomes the Finance Act. The Provisions of such Finance Act are thereafter
incorporated in the income tax Act and various other Acts which are relevant for direct and
indirect taxes.

CBDT (Central Board of Direct Taxes)

This Board is constituted under the Central Board of Revenue Act, 1963. It is the highest
authority of the Income Tax Department (ITD) and functions under the Ministry of Finance
of Government of India. It is the supreme authority in framing the IT Rules. U/s 295 it may
make Rules for the whole or any part of India for carrying out the purposes of the Act.

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TAXATION – FY 2022-23 – Intermediate
Fundamental concepts of income-tax law
Income u/s 2(24)
The concept of “income” under the Income-tax Act, 1961, is not the same as what
is generally understood as “income” in common parlance.
An exhaustive definition is one which confines the scope to what is contained in the
definition (It begins with ‘means…’), whereas an inclusive definition does not limit
the scope to what is mentioned in the definition (It begins with ‘includes…’).
The definition of “income” as per section 2(24) of the Income-tax Act, 1961, begins as
“income includes ……”. The definition of “income” is, therefore, inclusive and not
exhaustive. This implies that the scope of income is not confined only to the income
which are mentioned in section 2(24).
In Common Parlance Under the Income-tax Act, 1961
(1) Income is understood Income also includes casual income like winnings from
as a regular monetary lotteries, crossword puzzles etc.
return from specified [IFOS]
sources.
(2) Normally, only Capital gains on transfer of assets are specifically
revenue receipts are included in the definition of income. [Capital Gains]
considered as income.
(3) Income means the Income is also calculated applying a presumptive rate
actual income i.e., on gross receipts, in certain cases, for example, an
gross receipts less individual carrying on civil construction business
expenditure incurred. with gross receipts of, say, Rs.80 lakh, can calculate
his income by applying the presumptive rate of 6 %
o r 8% on Rs.80 lakh, even though his actual income
may be higher. [PGBP]
(4) Income generally Even notional income is treated as income, if specifically
refers to real income. provided under the Act i.e., annual value of a property
which is not actually let out but is deemed to be let out is
chargeable to income-tax. [HP]
(5) Income connotes the The deductions specifically provided for under the
gross receipts after Income-tax Act, 1961 can alone be reduced to
deducting actual compute income.
expenditure incurred to Also, if there are any restrictions on the quantum of
earn such receipts. deduction allowable under the Act, the deduction
would be allowed subject to such limits. For instance,
in case of salary income, children’s education
allowance is allowable as deduction only up to
Rs.100 per month, even though the employee may have
actually incurred more than Rs.100 p.m. and may be
getting a higher allowance. [Salary]
(6) Income is generally The Income-tax Act, 1961 has specific provisions
considered to belong to including the income of one person in the hands of the
the person who other, in certain circumstances, like including income of
receives the same. a minor child in the hands of the parent. [clubbing]

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TAXATION – FY 2022-23 – Intermediate
(7) Government Grants is Government grants, other than grants considered for
not part of income tax determination of “actual cost”, included in the
definition of “Income” (Subsidies can also be taxed)
However, subsidy or grant by the Central Government
for the purpose of the corpus of a trust or institution
established by the CG or State government shall not
form part of income . [PGBP or IFOS]

What is application of income and diversion of income?

Application of income Diversion of income
An obligation to apply income, An obligation to apply income in a particular way
which has accrued or has before it is received by the assessee or before it has
arisen or has been, received arisen or accrued to the assessee results in diversion of
amounts to merely the income. The source is charged with an over- riding title,
apportionment of income. which diverts the income. Therefore, the essentials are
Therefore the essentials of the as follows:
concept of application of 1. Income is diverted at source;
income under the provisions of 2. There is an overriding charge or title for such
the Income Tax Act are: diversion; and
1. Income accrues to the 3. The charge/obligation is on the source of income
assessee and not on the receiver.
2. Income reaches the Examples of diversion by overriding title are.
assessee a. Right of maintenance of dependants or of
3. Income is applied to coparceners on partition.
discharge an obligation, b. Right under a statutory provision.
whether self-imposed or c. A charge created by a decree of a court of law.
gratuitous. 4. Income is taxable after diversion of income
4. Income is taxable before
application of income

Previous Year & Assessment Year

Assessment year (A.Y.) means the period of twelve months commencing on the 1st
April every year. Assessment year is the financial year following the previous year.
Previous year (P.Y.) is the financial year immediately preceding the assessment year,
i.e., it is the financial year ending on 31st March, in which the income has
accrued/received. In case of a newly set-up business, the previous year would be the
period beginning with the date of setting up of the business or profession or, as the case
may be, the date on which the source of income newly came into existence, and
ending on 31st March.

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TAXATION – FY 2022-23 – Intermediate
Person [Section 2(31)]
The levy of income-tax is on every “person”. The definition of “person” is, again,
inclusive. It includes:
1. Individual
2. Hindu Undivided Family (HUF, in short) – Coparcener can demand partition,
other members of HUF cannot demand partition. Coparceners are the
sons/daughters upto 4 degrees of lineal descendants including himself (Karta)
3. Company
4. Firm
5. Association of persons (AOP) or a body of individuals (BOI), whether
incorporated or not
6. Local authority and
7. Artificial juridical person.

Assessee [Section 2(7)]

“Assessee” means a person by whom tax or any other sum of money is payable
under the Income-tax Act, 1961. In addition, it includes –
1) Every person in respect of whom any proceeding under the Act has been
taken for the assessment of –
(a) His income; or
(b) The income of any other person in respect of which he is assessable; or
(c) The loss sustained by him or by such other person; or
(d) The amount of refund due to him or to such other person.
2) Every person who is deemed to be an assessee under any provision of this Act (Eg:
Representative assessee u/s 160(1));
3) Every person who is deemed to be an assessee-in-default under any provision of
this Act (Eg: Non-deduction of TDS or non-payment of advance tax).

Previous year vs assessment year

General Rule: Income of the Previous Year is assessed to tax in the Assessment Year.
Exceptions: Exceptions to the rule that income of previous year is taxable in the assessment
year / when income of previous year is not taxable in the immediately following assessment
year i.e., income of previous year will be assessed in the PY itself.
a) Sec 172 – Income of non-resident from shipping business
- No representative in India
- Income derived from carrying passengers, livestock or goods shipped at a
port in India - 7.5% of the freight amount payable to owner of ship is
deemed to be the Income accruing to the owner.
b) Sec 174 – Income of persons leaving India.
c) Sec 174A – AOP / BOI formed for particular event / purpose and likely to be dissolved
thereafter.
d) Sec 175 – Transfer of property to avoid tax.
e) Sec 176 – Discontinued business.

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TAXATION – FY 2022-23 – Intermediate
Agricultural Income - Sec 2(1A)
Agriculture income means:
a. Any rent or revenue derived from land situated in India and used for agricultural
purposes.
b. Any income derived from such land by agricultural operations.
c. Any income derived from any building (farmhouse) used for Agricultural purpose
situated in the immediate vicinity of such land, assessed to land revenue or not
situated within ‘Specified Area’ (Specified Area means Urban area)

Star points to note:

1. Specified Area refers to specified urban limits:
Shortest aerial distance from the local Population according to the last
limits of a municipality or cantonment preceding census of which the
board relevant figures have been published
before the first day of previous year
Less than or equal to 2 kms More than 10k to 1 Lac
Less than or equal to 6 kms More than 1 Lac to 10 Lacs
Less than or equal to 8 kms More than 10 Lacs
2. Income from nursery (saplings and seedlings grown in a nursery) shall be deemed to be
agricultural income, whether or not the basic operations were carried out on land, as per
explanation 3 to 2(1A)
3. Salary received by partner from partnership firm which is earning agricultural income is
also deemed to be agricultural income in the hands of partner (Case Law: CIT vs
Chidambaram Pillai). The nature of income in the hands of the partners is same as the
nature of income in the hands of the firm. Therefore, if it is agricultural income for the
firm, it will continue to be the same for partners also (Similarly, if it is business income for
the firm, it will be business income for the partners).
4. Agricultural Income is exempt from Tax u/s 10(1)
5. Rent for agricultural land is deemed to be agricultural income irrespective of ownership of
land. Therefore, sub-letting of agricultural land will also be considered as Agricultural
Income.
6. Power to levy tax comes from Constitution - Article 246 Seventh schedule contains 3 lists
which gives respective authority to Centre & State.
Examples: -
List I – Union List - Entry 82 – Income Tax
List I – Union List - Entry 83 – Customs
List II – State List - Entry 46 – Tax on Agricultural Income

The following are non - agricultural income:

1) Income from Stone quarries.
2) Self-grown grass, trees, and bamboos.
3) Fisheries.
4) Sale of earth for brick making.
5) Remuneration received as manager of agricultural farm (Manager is only an employee
having salary income).
6) Dividend from a company engaged in agriculture. [Held in the case of Bacha F Guzdar
vs. CIT]
7) Dairy farming, poultry farming.
8) Interest on arrears of rent.

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TAXATION – FY 2022-23 – Intermediate
Q 1. From the situations given below identify income as agricultural and non-agricultural.
1. Wheat grown and sold
2. Coffee seeds grown and sold
3. Sold, self-grown trees
4. Income in the form of rent for granting rights for the others to use land for agriculture.
5. Interest on outstanding rent for granting rights for the others to use land for
agriculture.
6. Accountants’ salary who works in agricultural based company
7. X gave Rs.1,00,000 loan to Y, where Y is a cultivator of land. Y gave 100 kgs of rice
as Interest on loan to X. Is it income from agriculture for Mr X?
8. R invested Rs. 10,000 in a company and the company paid Rs.500 as dividend out of
its agricultural income. Is R’s Income considered as agricultural Income?
9. Ram received Rs.5,000 as insurance due to damage caused by heavy rain for his
crops.
10. Akshay a working partner received salary from his partnership firm, where the firm
is involved in growing flower and creepers.
11. Sale of stone obtained by digging the land.
12. Income from butter and cheese making.
13. Income from poultry farming.
14. Income in the form of Royalty from Mining.
15. Sale of grass to companies to maintain green lounge.

Summary of partly agricultural incomes:

Particulars Rule AI BI
Tea 8 60% 40%
Coffee Grown & Cured 7B 75% 25%
Coffee Grown, Cured, Roasted & Grounded 7B 60% 40%
Rubber 7A 65% 35%
Others 7 Average market price
- Sugar factories and others: Sale of sugar from sugarcane grown in own farm – average
market price of sugarcane / raw material (RM) is allowed as expenditure in computing
business income (Rule 7)

Agricultural Income = Market price – Cultivation Cost

Business Income (BI):-

Sales XX
Less: Market price of RM XX -
Manufacturing Cost XX XX
Business Income - XX

Q 2. Spectrum Agro Foods Ltd manufactures and sells tea. The raw materials of tea leaves
will be grown in their own agricultural land. The total profits from the above activities is
Rs. 30,00,000 for the FY. What is the income from agriculture?
In above problem, if the market value of tea leaves is Rs. 8,00,000 will your answer differ?

Q 3. Suncafe Coffee Ltd produces and sells Rs. 5,00,000 worth coffee which is grown in
their coffee estates and is cured by them. The profit made by this is Rs. 2,50,000. What is
the portion of agricultural Income?
In above Problem, if coffee is grown, cured, roasted and grounded by the company itself,
what will be the agricultural income?

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TAXATION – FY 2022-23 – Intermediate
Q 4. Natural Company Ltd sells both tea and rubber which are produced in the company’s
own farms. The profits earned from tea business is Rs. 9,50,000 and from latex (rubber)
is Rs. 8,00,000. What will be their agricultural income for the FY?

Q 5. Sweet Sugar Ltd grows sugarcane and manufactures sugar out of it.
For growing sugarcane the cultivation cost including ploughing and manure is
Rs.60,000.
The sale of sugar during the FY is Rs.2,50,000.
The manufacturing cost is Rs.1,00,000.
If the company would have sold sugarcane in the market without spending on
manufacturing, the market value for sugarcane would be Rs. 85,000.
Find out Income from business and income from agriculture for the FY.

Q 6. Miss Vivitha, a resident and ordinarily resident in India, has derived the following
income from various operations (relating to plantations and estates owned by her)
during the year ended:
S. No. Particular Amount
(i) Income from sale of centrifuged latex processed from rubber plants
grown in Darjeeling. 3,00,000
(ii) Income from sale of coffee grown and cured in Yercaud, Tamil Nadu. 1,00,000
(iii) Income from sale of coffee grown, cured, roasted and grounded, in
Colombo. Sale consideration was received at Chennai. 2,50,000
(iv) Income from sale of tea grown and manufactured in Shimla. 4,00,000
(v) Income from sapling and seedling grown in a nursery at Cochin. 80,000
Basic operations were not carried out by her on land.
You are required to compute the business income and agricultural income of Miss
Vivitha for the assessment year.

Answer
Computation of business income and agricultural income of Ms. Vivitha for the A.Y.
S. Source of income Gross Agricultural Business income
No. (Rs.) income
Amount % Amount
Total 5,90,000 5,40,000
Notes:
1. Operations are done in Colombo, Sri Lanka. Hence, there is no question of such
apportionment and the whole income is taxable as business income.
2. Explanation 3 to section 2(1A) seedlings grown in a nursery would be deemed to
be agricultural income whether or not the basic operations were carried out on land.

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TAXATION – FY 2022-23 – Intermediate
Q 7. Miss. Kavita, a resident and ordinarily resident in India, has derived from the following
income for the year ended 31st March:
Sl.No. Particulars Rs.
(i) Income from sale of centrifuged latex processed from rubber plants 1,00,000
grown in Darjeeling.
(ii) Income from sale of coffee grown and cured in Yercaud, Tamil 2,00,000
Nadu
(iii) Income from sale of coffee grown, cured roasted and grounded in 5,00,000
Colombo. Sale consideration was received in Chennai.
(iv) Income from sale of tea grown and manufactured in Shimla. 10,00,000
(v) Income from sapling and seedling grown in a nursery at Cochin. 2,00,000
Basic operations were not carried out by her on land.
You are required to compute the business income and agricultural income of Miss. Kavita
for the Assessment Year. [5 Marks – May 2018- Old Syllabus]
[Hint Ans: AI- Rs.10.15 Lakhs; BI - Rs.9.85 Lakhs]

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TAXATION – FY 2022-23 – Intermediate
Five Heads of Income - (Sec 14)
1. Income from Salaries - Sec 15 to 17
2. Income from House Property [HP] - Sec 22 to 27
3. Profits and Gains of Business or Profession [PGBP] - Sec. 28 to 44 DB
4. Capital Gains [CG] - Sec 45 to 55A
5. Income from other sources [IFOS] - Sec. 56 to 59

Computation of Total Income

1. Salaries xxx
2. Income from House Property xxx
3. Profits & Gains of Business or Profession xxx
4. Capital Gains xxx
5. Income from Other Sources xxx
Gross Total Income (GTI) xxx
Less: Chapter VI A Deductions - Sec 80C to 80U xxx
Taxable Total Income (TI) xxx

Tax payable on the above

(Normal Rate + Special Rate) xxx
Add: Health and Education Cess @ 4% Xxx
Tax Liability xxx
Less: Advance Tax Paid and TDS xxx
Net Tax Liability xxx
Add: Interest u/s 234 A, B, C or F xxx
Total Tax Payable xxx
Note: Gross Total Income = 5 heads of income + Clubbing of income + set off of losses

Basis of charge & Rates of Taxes [Section 4]

Section 4 of The Income-Tax Act is the charging section which provides that:
i. Tax shall be charged at the rates prescribed for the year by the annual Finance Act.
(Normal Rates)
ii. The charge is on every person specified under section 2(31);
iii. Tax is chargeable on the total income earned during the previous year and not the
assessment year. (There are certain exceptions provided by sections 172, 174, 174A,
175 and 176);
iv. Tax shall be levied in accordance with and subject to the various provisions
contained in the Act. (Special Rates)
This section is the back bone of the law of income-tax in so far as it serves as the most
operative provision of the Act. The tax liability of a person springs from this section.

On what rate, is the total income of the assessee taxed?

Ans: The total income of the assessee is taxable at the following two rates:
1. Normal rates, which are given in the Finance Act, every year.
2. Special rates which are given in the Income-tax Act itself e.g., long-term
capital gain is taxable @ 10% or 20% u/s 112 and 112A, short-term capital
gain u/s 111A is taxable @ 15% and income from lotteries, crossword
puzzles, etc is taxable @ 30% u/s 115BB. 115BBG for Sale of Carbon
Credits @10%.

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TAXATION – FY 2022-23 – Intermediate
TAX SLABS [Progressive Rates of Tax] (Normal Rates of Tax)
Individual, HUF, AOP, BOI, Artificial Juridical Person:

Income Rate of tax

Upto 2,50,000 (BEL) Nil
2,50,001 to 5,00,000 5%
5,00,001 to 10,00,000 20%
More than 10,00,001 30%
Health and Education Cess [HE] at 4%
Rates of income-tax (Wordings as per Finance Act)

where the total income does not exceed Rs. Nil;

2,50,000
where the total income exceeds Rs. 2,50,000 but 5 percent of the amount by which
does not exceed Rs. 5,00,000 the total income exceeds
Rs.2,50,000;
where the total income exceeds Rs. 5,00,000 but Rs. 12,500 plus 20 percent of the
does not exceed Rs. 10,00,000 amount by which the total income
exceeds Rs. 5,00,000;
where the total income exceeds Rs. 10,00,000 Rs. 1,12,500 plus 30 percent of the
amount by which the total income
exceeds Rs. 10,00,000
Note: New Slabs or Alternate Tax structure u/s 115BAC subject to conditions are discussed
later.
BEL (Basic Exemption Limit)
Resident male/women Assessee: BEL will be Rs.2,50,000
Resident Senior Citizen (60 years and above): BEL will be Rs.3,00,000 [Born on or before
01st April 1963]
Resident Very Senior Citizen (80 years and above): BEL will be Rs.5,00,000 (No 5% slab).
[Born on or before 01st April 1943]
Non Residents: BEL will be Rs.2,50,000 irrespective of senior citizen.
Senior citizen: is one who attains 60 years or more at any time during the Previous Year.
Note: As per CBDT clarification, an individual born on 1st April would complete each year
of his age on 31st March. [Circular 28/2016 dated 27.07.2016]

Sec 87A- Rebate of Income Tax / Relief

1. Sec 87A-Relief for Individual Tax Payers resident in India having total income
(taxable income) upto Rs. 5 lakhs.
2. A tax credit (deduction from tax) of Rs. 12,500 or tax liability whichever is less
shall be available.
3. No 87A rebate for income u/s 112A. Therefore, for all other incomes including
casual income will be entitled to Section 87A rebate if below three conditions are
satisfied.
4. All three conditions to be satisfied to be eligible for 87A relief:
a. Individual
b. Resident
c. Total Income does not exceed Rs. 5 Lakh

Average Rate of tax

As per section 2(10), “Average Rate of tax” Means the rate arrived at by dividing the
amount of income-tax calculated on the total income, by such total Income.

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TAXATION – FY 2022-23 – Intermediate
Q 8. Compute tax liability of Mr A if taxable income is Rs 12,00,000. Also compute average
rate of tax.
Q 9. Compute tax liability of Mr A if taxable income is Rs 10,00,000. Also compute average
rate of tax
Q 10. Compute tax liability of Mr A if taxable income is (a) Rs 3,50,000; (b) Rs. 5,00,000;
(c) Rs. 6,00,000
Q 11. Compute tax liability of Mr A if taxable income is Rs 3 Crores.

Partnership Firm & Limited Liability Partnership

 Rate of income tax is 30% [Flat rate of tax; No BEL]
 HE @ 4% is levied irrespective of income
 Surcharge is 12% if income exceeds 1 Crore.

Companies
 Domestic Companies - Rate of income tax is 30% (40% in case of Foreign Companies)- Tax
rate will be 25% if turnover/Sales does not exceed 400 crores (4 billion) in case of domestic
companies.
 HE cess @ 4% is levied irrespective of income
 If total income exceeds Rs.1 Crore – Applicable surcharge is 7% in case of Domestic
Companies (Surcharge will be 12% if total income exceeds Rs 10 Crores)
 Surcharge will be 2% in case of Foreign Companies whose total income exceeds Rs 1 Crore
upto Rs 10 Crores (Surcharge will be 5% if total income exceeds Rs 10 Crores)

Summary on Surcharge

Assessee > 50 Lakh > 1 Crore > 2 Crore > 5 Crore > 10 Crore
to 1 Crore to 2 Crore to 5 Crore to 10 Crore
Individual/HUF/ 10% 15% 15% 15% 15%
AOP/BOI/AJP
with capital
gains u/s 111A*
and any LTCG*
*Discussed later
Individual/HUF/ 10% 15% 25% 37% 37%
AOP/BOI/AJP
with income
other than Sec
111A and LTCG
Partnership - 12% 12% 12% 12%
Firm/ LLP
Domestic - 7% 7% 7% 12%
Company
Foreign - 2% 2% 2% 5%
Company

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TAXATION – FY 2022-23 – Intermediate
Rate of Surcharge applicable to Individuals/HUF/AOPs/BOIs/Artificial Juridical
Person from A.Y.2020-21 [as introduced by The Taxation Laws (Amendment) Act,
2019]

Sr. Particulars Rate of Example

No. surcharge Components of Applicable rate of
total income surcharge
(i) Where the total 10%  STCG u/s Surcharge would be
income (including 111A levied @ 10% on
income under Rs. 30 lakhs; income-tax computed
section 111A and  LTCG u/s on total income of
LTCG) > Rs. 50 112A Rs.95 lakhs.
lakhs but ≤ Rs. 1 Rs. 25 lakhs;
crore and
 Other income
Rs. 40 lakhs
(ii) Where total 15%  STCG u/s Surcharge would be
income 111A levied @ 15% on
(including Rs. 60 lakhs; income-tax computed
income under  LTCG u/s on total income of Rs.
section 111A 112A Rs.65 1.75 crores.
lakhs; and
and LTCG)
 Other income
exceeds Rs.1
Rs. 50 lakhs
crore but does
not exceed Rs.2
crore
(iii) Where total 25%  STCG u/s Surcharge would be
income 111A Rs.54 levied @ 15% on
(excluding lakh; income-tax on:
Dividends,  LTCG u/s  STCG of Rs.54
income under 112A lakhs
section 111A Rs. 55 lakh; chargeable to
and LTCG) and tax u/s 111A;
exceeds Rs.2 and
 Other income
crore but does  LTCG of Rs.55
Rs. 3 crores
not exceed Rs.5 lakhs chargeable
crore to tax u/s 112A.

The rate of Surcharge @ 25%

surcharge on the Not would be leviable on
income-tax exceeding income-tax computed
payable on the 15% on other income of Rs.
portion of 3 crores included in
inco total income
me chargeable to
tax under
dividends,
section 111A and
LTCG

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TAXATION – FY 2022-23 – Intermediate
(iv) Where total 37%  STCG u/s Surcharge @ 15%
income 111A would be levied on
(excluding Rs.50 lakhs; income-tax on:
dividends,  LTCG u/s  STCG of
income under 112A Rs.50 lakhs
section 111A Rs. chargeable to tax
and LTCG) 65 lakhs; and u/s 111A;
exceeds Rs. 5 crore

Tax on income of certain domestic companies – Section 115BAA

Option to pay tax at 22% plus surcharge at 10% (Effective Rate 25.17%) from A.Y. 2020-
2021 if conditions are satisfied as under:

6. Company should not claim the following deductions:

a) 10AA- SEZ
b) 32(1)(iia) – Additional depreciation or Enhanced depreciation
c) 32AD – Investment allowance – Backward Area
d) 33AB – Tea/ Coffee/ Rubber development A/c
e) 33ABA – Site Restoration Fund
f) 35 – Scientific Research
g) 35AD – Specified business (14 business)
h) 35CCC/35CCD – Notified Agricultural extension projects/Skill development
projects
i) Chapter VIA deductions under heading C i.e., deductions in respect of certain
incomes other than Section 80JJAA
7. Without set off of losses carried forward from earlier year if such loss is attributable to
any deduction referred above and if such loss is attributable to depreciation u/s 32 (ND)
other than additional depreciation such losses shall not be claimed in any future year also
8. Option once exercised shall apply to subsequent years also and cannot be withdrawn

Tax on income of certain new domestic manufacturing companies – Section 115BAB

Manufacturing company has option to pay tax at 15% (Effective rate 17.16%) plus surcharge
at 10% from A.Y. 2020-21 if following conditions are satisfied:
a) Company registered on or after 01.10. 2019 and commence manufacturing on or before
31.03.2023.
b) Not formed by splitting up or reconstruction
c) Not used plant or machinery except if imported or value of used plant or machinery is
not more than 20% of total plant or machinery
d) Does not use any building previously used as a hotel/convention center as given u/s 80-
ID
e) Company is not engaged in any business other than the business of manufacture or
production of any article or thing and research in relation to or distribution of such article
or thing manufactured or produced by it.
f) The total income of the company has been computed without any deductions and losses
set off as per conditions of Section 115BAA
g) Option once exercised shall apply to subsequent years also and cannot be withdrawn

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Total Income T/O 2017-18 115BA 115BAA 115BAB Other

(4 Billion) Companies
Upto 10 million 25% 25% 25.168% 17.16% 30%
10 to 100 million 27.82% 27.82% 25.168% 17.16% 33.384%
Above 100 million 29.12% 29.12% 25.168% 17.16% 34.944%

Companies opting for 115BAA/BAB are exempt from MAT. For companies not opting, MAT
u/s 115JB is reduced to 15% from F.Y.2019-20

Short Notes on Rounding off of Total Income – Section 288A

 The total income computed shall be rounded off to the nearest multiple of ten rupees and
for this purpose any part of a rupee consisting of paise shall be ignored.
 Examples:
1. If TI is Rs.79, 467 it shall be rounded off to Rs.79, 470.
2. If TI is Rs. 79,464.90 it shall be rounded off to Rs. 79,460
3. If TI is Rs. 79,465 it shall be rounded off to Rs. 79,470

Short Notes on Rounding off of tax – Section 288B

 The amount of tax after adjusting advance tax and TDS (tax deduction at source) or
interest, penalty, fine, or any other sum payable, and the amount of refund due, under the
provisions of the Income tax Act, shall be rounded off to the nearest multiple of ten
rupees then, if such part is five rupees or more, it shall be increased to ten rupees and if
such part is less than five rupees it shall be ignored.
 Example:
If the amount of tax payable is Rs.65,424, it shall be rounded off to Rs. 65,420
If the amount of tax payable is Rs.65,425, it shall be rounded off to Rs.65,430

MMR u/s 2(29C)

It refers to maximum marginal rate, i.e., rate of income tax including surcharge and cess
applicable to the highest slab of income in case of individual, AOP or BOI.
MMR = 42.744% if income exceeds 5 Crore for individuals

Computation of tax by aggregation of income

Steps for computation of tax payable on non-agricultural income after aggregation of
agricultural income:
Step 1: Aggregate agricultural income with non-agricultural income & determine tax.
Step 2: Aggregate agricultural income with basic exemption limit and determine tax
Step 3: Difference between (1) & (2) is tax payable on non-agricultural income.
Step 4: Add 4% Cess to determine final Tax Liability

Conditions:
a) Non-agricultural income – Exceeds basic exemption limit [NAI refers to 5 heads of
income. NAI = TI]
b) Agricultural income exceeds Rs 5,000.

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TAXATION – FY 2022-23 – Intermediate
Q 12. Compute tax liability of ‘Mr. B’ if taxable income is Rs 10,00,000 and agricultural
income is Rs 15,00,000.

Q 13. Mr. Ashwin Gowda Patil has taxable income from house property of Rs.1,20,000 and
agricultural income of Rs. 30,000. Calculate the tax liability for FY.

Q 14. Ms. Avani, a resident aged 25 years, manufactures tea leaves from the tea plants grown
by her in India. These are then sold in the Indian market for Rs. 40 lakhs. The cost of
growing tea plants was Rs. 15 lakhs and the cost of manufacturing tea leaves was Rs. 10
lakhs. Compute her tax liability for the A.Y. [7 Marks-May 2018-New Syllabus]
[AI – Rs.9 Lakh; BI – Rs.6 L; TI - Rs.1,09,200]

Q 15. Compute tax liability if AI is 15 lakhs and NAI is 4.50L

[Hint- TL- 49,400]

Marginal Relief
The concept of Marginal Relief is applicable in case of individuals having a total income
exceeding a sum of Rs.50L. Similar provision is applicable to companies, etc attracting
surcharge. The objective of this relief is to give concession to assessee, whose income
has marginally exceeded Rs.50L/1 Crore/ 2 Crore/ 5 Crore

Steps Computation Methodology

I Compute the total amount payable as income tax and surcharge on the total income
II Compute the tax payable on Rs.50L plus the excess of the total income over Rs.50L
III Amount payable as income tax and surcharge shall be the amount arrived in Step-I
or Step-II, whichever is lower.
IV Add Cess on tax after Step III

Break Even Point (BEP) for Marginal Relief

Individual
Income marginally Regular assessee Senior Citizen Very Senior Citizen
exceeds… [SC] [VSC]
50L 51,95,890 51,95,520 51,94,020
1 crore 1,02,14,690 1,02,14,500 1,02,13,740
2 crores 2,09,30,000 2,09,29,600 2,09,28,000
5 crores 5,30,17,820 5,30,17,300 5,30,15,280
Partnership Firm
Income > 1 Crore 1,05,42,160
Company
DC @ 25% DC @ 30% FC
1 crore 1,02,38,900 1,03,09,270 1,01,35,130
10 crores 10,17,36,110 10,22,59,030 10,20,68,960

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Important Sections in Chapter-1

Section Particulars
2(7) Assessee
2(31) Person
172 Income of non-resident from shipping business
174 Income of persons leaving India
174A AOP / BOI formed for particular event / purpose and likely to be dissolved
175 Transfer of property to avoid tax
176 Discontinued business
2(1A) Agricultural Income
10(1) Exemption for Agricultural Income
87A Rebate / Relief
288A Rounding off Income
288B Rounding off Tax

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TAXATION – FY 2022-23 – Intermediate
CHAPTER-2
Residential Status and Scope of Income
Residential status of Individual [Sec 6(1)]
Resident – Satisfies at least one basic condition.
Non - Resident (NR) – does not satisfy even one basic condition.

I) Basic condition:
a) Stays in India for 182 days or more in previous year
OR
b) Stays in India for 60 days or more in previous year and 365 days or more during 4
years preceding the previous year.
Exceptions [Explanation 1 to Sec 6(1)] – Substitute 182 days in place of 60 days for
a) Citizen of India who leaves India for the purpose of employment or as member of
crew of Indian ship (He becomes a Non-resident if he leaves India by September
28th of PY)
b) Citizen of India or foreign national of Indian origin living outside India comes on a
visit to India. (Indian Origin i.e., he or his parents or grandparents were born in
undivided India)

II) Additional conditions: [Sec 6(6)]

An individual who is resident in India is said to be ‘not ordinarily resident in India’ if he
satisfies any of the following conditions:
1. Non-Resident for at least 9 years out of 10 PPY.
OR
2. Stays in India for 729 days or less during 7 PPY.
OR
3. Citizen/PIO with >15L & 120 days but less than 182 days + 365
days in 4 PPY
OR
4. Deemed Resident u/s 6(1A) – citizen with >15L & not liable in
any other country

NOTE:
1) Same place or continuous stay is not necessary.
2) Stay in Territorial waters of India is considered as stay in India.
3) Where it is not practical to determine hour of entry and departure, both day of entry and
day of departure can be taken as stay in India

Member of crew
According to Rule 126, for the purposes of section 6(1), in case of an individual, being a
citizen of India and a member of the crew of a ship, the period or periods of stay in India shall,
in respect of an eligible voyage, not include the following period:
• From date of joining the ship
• To date of signing off from the ship
• As per the Continuous Discharge Certificate

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Seafarer – (a person who regularly travels by sea) – NRE a/c
• Clarification regarding liability to income-tax in India of a non-resident seafarer
receiving remuneration in NRE (Non-Resident External) account maintained with an
Indian Bank [Circular No.13/2017, dated 11.04.2017 and Circular No.17/2017, dated
26.04.2017]
• Income by way of salary, received by non-resident seafarers, for services rendered
outside India on a foreign going ship (with Indian flag or foreign flag) and received
into the NRE bank account maintained with an Indian bank shall not be included in
the total income.

Note: Condition 3 & 4 is direct entry to RNOR irrespective of BC. Therefore need not check
BC for 3 & 4.
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4) Definition of ‘India’ [Section 2(25A)]

The term 'India' means –
i) the territory of India as per article 1 of the Constitution,
ii) its territorial waters, seabed and subsoil underlying such waters,
iii) continental shelf,
iv) exclusive economic zone or
v) any other specified maritime zone and the air space above its territory and territorial
waters.
Specified maritime zone means the maritime zone as referred to in the “Territorial Waters,
Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976.”

Q 16. Mr. Shiva left India for the first time on May 29, of PY to Canada and never returned
back during the previous year. Determine the residential status of Mr. Shiva for the FY.
Will your answer change if he stays for one more day in India?

Q 17. Mrs. Sharada left India for the first time after 25 years on 01.05. of PY to USA. She
came back to India on 10.03. of PY at 10.00 am. Determine her residential status for the
FY. What will be your answer if she came back to India on March 1, of PY?

Q 18. Mrs.Karuna Kapoor is a Bollywood actress. Her passport reveals the following
information about her stay in India.

2022-23 From April 3rd to July 11th

2021-22 From June 22nd to July 11th
2020-21 From Feb 10th to March 26th
2019-20 From Sept. 7th to March 26th
2018-19 From May 17th to September 30th
2017-18 From April 3rd to July 11th
2016-17 From April 3rd to July 11th
2015-16 From April 3rd to July 11th
2014-15 From April 3rd to July 11th

Find out her residential status for the Assessment year [May 2018-5Marks -Old Syllabus]
[Hint Ans: RNOR]

Q 19. Brett Lee, an Australian cricket player visits India for 100 days in every financial
year. This has been his practice for the past 10 financial years.
(a) Find out his residential status for the assessment year 2023-24.
(b) Would your answer change if the above facts relate to Srinath, an Indian citizen who
resides in Australia and represents the Australian cricket team?
(c) What would be your answer if Srinath had visited India for 120 days instead of 100
days every year, including P.Y.2022-23?

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TAXATION – FY 2022-23 – Intermediate
Residential status of HUF, Firm, AOP [Sec 6(2)]
(1) Resident – Control and Management of its affairs is situated wholly or partly in
India.
(2) Not ordinarily resident – Firm and AOP cannot be RNOR. HUF can be RNOR if the
Karta or manager satisfies both or one of the additional conditions.
(3) Non-resident – Control and Management of its affairs is situated wholly outside India.

Residential status of Companies [Sec 6(3)]

Resident – A Company would be resident in India in any previous year, if:
 Indian Company [Sec 2(26)] or
 its place of effective management (POEM) at any time in that year, is in India.
“Place of effective management” [POEM] means a place where key management and
commercial decisions that are necessary for the conduct of the business of an entity as a
whole, are in substance made.
Non-resident – Place of Effective Management outside India

Company

Indian Foreign
Company Company
(Incorporated (Incorporated
in India) outside India)

POEM outside
Always POEM in India
India
Resident Resident
Non Resident

Q 20. Identify the status of the following persons for the FY:
a) Mr. ‘S’, an Indian citizen leaves India for taking up employment in Singapore on
15th September of FY.
b) Mr. ‘K’ is a person of Indian origin settled in Australia visits India during the FY
and stays for 162 days in India.
c) ‘X’ limited, an Indian public company gets its shares listed in a recognized stock
exchange on 15th March of FY. What will be your answer if the POEM is not wholly
situated in India?

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TAXATION – FY 2022-23 – Intermediate
SCOPE OF TOTAL INCOME [Sec 5]
Particulars ROR RNOR NR
1. Income received or deemed to be received in India (Sec 7 & T T T
8)
2. Income accruing or arising or deemed to accrue or arise in T T T
India (S.9)
3. Income accruing or arising outside India:
a) Business controlled in India or profession set up in India T T NT
b) Any other Income T NT NT
Note:-
1) For ROR, global income is taxable in India
2) Mere Remittance/ Transfer from outside India into India are not considered as Income.
Similarly, past untaxed profits brought into India is also not taxable.
3) Merely because income accruing outside India is included in Balance Sheet prepared in
India, it shall not be deemed to be received in India.
4) Accrue refers to the right to receive income whereas, due refers to the right to enforce
payment of the same. E.g.: salary for work done in August will accrue throughout the
month, day to day, but will become due on the salary bill being passed by end of August
or beginning of September.
5) Income which has been taxed on accrual basis cannot be assessed again on receipt basis
& vice-versa

Income deemed to accrue or arise in India - Sec 9(1)

1) Income from business connections in India (e.g. maintaining branch office, appointment
of agent etc) will be taxable in all cases.
Exceptions to Business Connection: (will not be taxed in India)
a) In case of Non-resident – Income from purchase of goods in India for the
purpose of Export.
b) In case of Non-resident carrying on business of running a News Agency
/Publishing newspaper, Magazines, Journals – Income from collection of news
and views in India for transmission out of India.
c) In case of Non- Resident Individual or firm or Company where the individual /
all partners of firm / all Shareholders of Company are not Indian citizen and not
resident in India, Income from shooting of any Cinematograph film in India.
d) In the case of a foreign company engaged in the business of mining of diamonds,
no income shall be deemed to accrue or arise in India to it through or from the
activities which are confined to display of uncut and unassorted diamonds in a
Special Zone notified by the Central Government.
A “Special Notified Zone” (SNZ) had been created to facilitate shifting of
operations by foreign mining companies (FMC) to India and to permit the trading
of rough diamonds in India by the leading diamond mining companies of the
world
2) Income from any property in India / asset or source of income in India / transfer of capital
asset situated in India.
3) Income earned in India i.e. Services rendered in India.
4) Salary payable by Govt. of India to a citizen of India for services outside India.
5) Dividend paid by Indian company outside India (deemed to accrue in India).
6) Income by way of interest payable by:[9(1)(v)]
- Government.
- Resident - if money used in India.
- Non-resident - if money used in India for Business or profession in India

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TAXATION – FY 2022-23 – Intermediate
7) Income by way of royalty payable by:
- Government.
- Resident - if used in India.
- Non-resident - if used in India for Business or profession in India
8) Income by way of fees for technical services (FTS) payable by:
- Government
- Resident - if used in India.
- Non-resident - if used in India for Business or profession in India
9) Deemed accrual of gift made to a person outside India or Foreign Company by resident
on or after 5th July 2019 by way of money or property situated in India which is
chargeable to tax u/s 56(2)(x).

Section 5 – Scope of Total Income

On HP and Dividends
Particulars ROR RNOR NR
HP situated in India, income received anywhere (Deemed to T T T
accrue in India)
Deposits with an Indian company for which interest is T T T
received outside India etc (Deemed to accrue in India)
Dividends from Indian Co received anywhere (Deemed to T T T
accrue in India)
Dividends from Foreign Co received in India T T T
Dividends from Foreign Co received outside India (Global T NT NT
income is taxable)

Q 21. Examine the tax consequences of the transactions in the following cases:
a) A Non Resident company purchases goods in India for the purposes of export.
b) The Govt. of India pays a salary of 1 lakh dollars to a non-resident for services
rendered by him in USA.

Q 22. Samsung, a South Korean company, a NR under the IT Act, 1961 had the following
receipts of royalty in FY. Indicate whether they will be taxable in India. Give reasons for
your answer.
a) Rs. 50,000/- from the Govt. of India under an agreement approved by the Govt. of
South Korea and India.
b) Rs. 1,00,000/- from Calcutta Company ltd., a resident Indian company for import of
technical know- how for use in a business in India.
c) Rs. 75,000/- from a business by company a resident Indian organisation for import of
drawing for use in its business in Singapore and Malaysia.
d) Rs. 50,000/- from Keshoram, a NR under IT law, for use of a formula for a business
in India.
e) Rs. 40,000/- from X, an Indian NR for use of drawings and technical know-how for a
business in the U.K.

Q 23. Mr. Yashwant Sinha, an Indian citizen, who is appointed as Taxation officer by the
Govt. of Nigeria, leaves India for the first time, on 26th September of FY for joining his
duties in Nigeria. Determine his Residential Status and compute his GTI from following
particulars:
(a) Salary received in India - Rs. 36,000/-.
(b) Salary earned and received in Nigeria – Rs. 1,20,000/-.
(c) Dividends from Indian Companies – Rs. 30,000/-.

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Q 24. DAISY Ltd., a foreign company, incorporated in USA and engaged in the
manufacturing and distribution of diamonds, set up a branch office in Indian in June of
the PY. The branch office was required to purchase uncut and unassorted diamonds from
the dealers of Mumbai and export them to USA. During the Previous Year, profit from
such export amounted to Rs. 75 lakhs.
Out of 20 shareholder of DAISY Ltd., 12 shareholders are non-resident in India. All the
major decisions were taken through Board Meetings held at USA.
(a) Determine the residential status of DAISY Ltd. For the Assessment Year.
(b) Discuss the tax treatment of profit from export business. [Nov 2017 – 5 Marks]
[Hint Ans: POEM outside India. Therefore Non-Resident. Explanation I to Section 9(1)
– Exception to business connection i.e. purchase of goods in India for the purpose of
exports by a NR]

Q 25. Sri. Hanuman Prasad has the following incomes for the FY.
a. Income from salary in India from a company (He went to Australia for some
months due to his service and received Salary for such period there) Rs. 50, 000.
b. Dividend from an Indian Company received in England and spent there Rs.
10,000.
c. Income from house property in India received in Pakistan Rs. 20, 000.
d. Dividend from a foreign company received in England and deposited in a bank
their Rs.10,000.
e. Income from business in Calcutta controlled from U.S.A. Rs. 20,000.
f. Income from business in U.S.A. (Controlled from Kanpur Head Office)
Rs.12,000.
g. Income was earned in Australia and received there but brought into India Rs.
25,000.
h. His maternal uncle sent a Bank Draft from France as a gift to him on his marriage
Rs. 20,000.
Compute the gross total Income for the FY, if he is:
i) Resident.
ii) Not Ordinarily Resident
iii) Non-Resident.
[Hint Ans: ROR – 1.47L; RNOR – 1.12L; NR – 1L]

Q 26. The following are the incomes of Shri Subhash Chandra, a citizen of India for the
previous year:
a. Income from business in India Rs. 2,00,000. The business is controlled from
London and Rs. 60,000 were remitted to London
b. Profits from business earned in Japan Rs. 70,000 of which Rs. 20,000 were received
in India. This business is controlled from India.
c. Untaxed income of Rs. 1,30,000 for the year 2016-17 of a business in England
which was brought in India on 3rd March of PY.
d. Royalty of Rs. 4,00,000 received from Shri Ramesh, a resident for technical service
provided to run a business outside India.
e. Agricultural income of Rs. 90,000 in Bhutan
f. Rent of Rs. 73,000 from house property in Dubai, which was deposited in bank at
Dubai
Compute gross total income of Shri Subhash Chandra for the A.Y., if he is –
1. A Resident and Ordinarily Resident
2. A Resident and Not Ordinarily Resident
3. Non- Resident [May 2019 -7 Marks – New Syllabus]
[Hint Ans: 8,11,100; 2,70,000; 2,20,000]
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TAXATION – FY 2022-23 – Intermediate
Important Sections in Chapter-2
Section Particulars
5 Scope of TI
6 RS
6(1) & (6) RS of Individual
6(2) RS of HUF and Partnership Firm
6(3) RS of Company
Three important points on Computation under this Chapter
Note-1 Past untaxed income is NT
Note-2 Agriculture income from outsisde india is taxable
Note-3 Rent Received is entitled to SD@30% in computation Income from HP

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TAXATION – FY 2022-23 – Intermediate
CHAPTER-3
Incomes which do not form part of Total Income or Exemptions
Sec 10 to Sec 13B
Income Totally Exempt:
Sec 10(1) Agricultural Income
Sec 10(2) Sums received from HUF except income derived from converted
property stated in Sec 64(2)
Sec 10(2A) Share of profit of a partner from the firm
Sec Payments made under Bhopal Gas Leak Disaster (Processing of
10(10BB) Claims) Act, 1985
Sec Any amount received from CG or SG or local authority by an individual
10(10BC) or his legal heir by way of compensation on account of any disaster
Sec 10(10D) General rule: [EEE Method]
Any amount received from LIC is exempt.
Exception:- [EET Method]
a) Amount received from LIC/UTI under a scheme referred u/s
80 DD wherein the handicapped dependant dies before the
individual.
b) amount received under Keyman Insurance Policy is not exempt
– u/s 10(10D)
c) insurance policy issued on or before 31-03-12 in which the
premium payable for any year exceeds 20% of sum assured.
d) Amount received under any insurance policy issued on or after
01-04-2012 in which the premium payable for any year exceeds
10% of sum assured.
Sec 10(11A) Any payment from an account, opened in accordance with the
Sukanya Samriddhi Account Rules, 2014 made under the Government
Savings Bank Act, 1873. Interest accruing on deposits under this
scheme would be exempt. [Investment exempt u/s 80C]
Sec 10(16) Educational Scholarship to meet cost of education granted by
Government or any other organization
Sec10 (18) Pension received by gallantry awardee or member of his family.
Includes Freedom fighter pension, Ex-servicemen pension.
Sec Sikkimese individual deriving income from any source in the State of
10(26AAA) Sikkim or income by way of dividend or interest on securities whether
generated in Sikkim or any other place. However, this exemption is not
available to Sikkimese women who marries a Non-Sikkimese on or
after 01.04.2008
Sec 10(17) Daily Allowance and Constituency Allowance received by MP and
MLA is fully exempt

Awards and Rewards

Sec By the Central Government / State Government / Approved body for
10(17A) literacy, scientific or artistic work or attainment or for service for
alleviating the distress of the poor, the weak and the ailing, or for
proficiency in sports and games or gallantry awards approved by the
Government.
Awards to Sportsmen: Award to a Sportsman who is a Professional is
taxable. If he is not a professional, award is not taxable. It is intended
as gift under IFOS [C.No : 447/22.01.86, Revised Circular 2/2014]
Reward to Medal Winners: Reward by Government to Medal Winners
of Olympics, Common wealth, Asian games are exempt.
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NRE a/c Interest u/s 10(4)

Interest from NRE account – [Non-Resident (External) a/c] is exempt if permitted by
RBI subject to conditions u/s 10(4). Similarly salary received in NRE a/c by seafarer is
not taxable.

TAX HOLIDAY FOR NEWLY ESTABLISHED UNITS

IN SPECIAL ECONOMIC ZONES [SECTION 10AA]
A deduction of profits and gains which are derived by an assessee being an entrepreneur
from the export of articles or things or providing any service, shall be allowed from the
total income of the assessee.
10AA Tax holiday for newly established units in Special Economic Zones (SEZs), which
has begun or begins to manufacture or produce articles or things or computer software or
provide any service on or after 1.4.2005 in any SEZ for 15 consecutive assessment years
in respect of its profits from exports. If letter of approval is issued on or before 31-3-2020
and begins manufacture or production or providing of services on or before 1-4-2021, it
is deemed to have begun manufacture during 20-21 and eligible for exemption u/s 10AA.

Amount of exemption = Profits of Unit in SEZ x Export turnover of Unit SEZ

u/s 10AA for SEZ Total turnover of Unit SEZ

100% of such profits would be exempt in the first five years, 50% in the next five years
and in the last five years, 50% subject to transfer to special reserve (to be called the
“Special Economic Zone Re-investment Reserve Account”) to be created and utilized in
the manner laid down under section 10AA(2)
Example:
An undertaking is set up in a SEZ and begins manufacturing on 15.10.2005. The deduction
under section 10AA shall be allowed as under:
(a) 100% of profits of such undertaking from exports from A.Y.2006-07 to A.Y.2010-11.
(b) 50% of profits of such undertaking from exports from A.Y.2011-12 to A.Y. 2015-16.
(c) 50% of profits of such undertaking from exports from A.Y.2016-17 to A.Y.2020-21
provided certain conditions are satisfied.
Consequences of mis-utilisation / non-utilisation of reserve [Section 10AA(3)]
Where any amount credited to the Special Economic Zone Re-investment Reserve
Account -
(a) has been utilised for any purpose other than those referred to in sub-section (2), the
amount so utilized shall be deemed to be the profits in the year in which the amount was
so utilised an charged to tax accordingly; or
(b) has not been utilised before the expiry of the said period of 3 years, the amount not so
utilised, shall be deemed to be the profits in the year immediately following the said period
of three years and be charged to tax accordingly.

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Computation of profit and gains from exports of such undertakings

Export Profit of the business of the undertaking x Export turnover

Profit Total turnover.
Export Export consideration brought to India in convertible foreign
Turnover exchange within 6 months from the end of the relevant PY
LESS: Freight, telecommunication charges or Insurance attributable
to activities outside India and Foreign Exchange expense for
Technical Services outside India. [FITS]

Restriction on double deduction: In case the assessee has availed deduction under the above
referred sections, no deduction can be claimed under Chapter VIA (ie, 80IA, 80IB etc)
Note: No deduction u/s 10AA shall be available to units commencing manufacture or
production of article or thing or start providing services on or after 01/04/2021.

Q 27. Rudra Ltd. Has one unit at Special Economic Zone (SEZ) and other unit at Domestic
Tariff Area (DTA), the company provides the following details for the previous year.
Particulars Rudra Ltd. Unit in DTA
Total Sales 6,00,00,000 2,00,00,000
Export Sales 4,60,00,000 1,60,00,000
Net Profit 80,00,000 20,00,000

Calculate the eligible deduction under section 10AA of the Income-tax Act, 1961, for
the Assessment year, in the following situations:
i. If both the units were set up and start manufacturing from 22-05-2015.
ii. If both the units were set up and start manufacturing from 14-05-2019.
[Hint Ans: 22.50 Lakhs; 45 Lakhs]

Important Sections in Chapter-3

Section Particulars
10(1) Agricultural Income
10(2) Share from HUF
10(2A) Share of Profit from Partnership Firm
10(4) Interest on NRE a/c
10(17) Mp / MLA – DA & CA
10(17A) Awards – Government Approved
10AA SEZ profits for Exports

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CHAPTER-4
INCOME UNDER THE HEAD SALARIES [Sec.15 to 17]
Charging section/Basis of charge [Sec.15]
1) There must be employer employee relationship. [Based on Agreement – Terms of
Employment]
2) Salary is taxable either on due or receipt basis whichever is earlier (therefore advance
salary is also taxable).
3) Arrears of salary not taxed earlier are also taxable (increment with retrospective effect)
Star Points to note:
1) Where any salary, paid in advance, is assessed in the year of payment, it cannot be
subsequently brought to tax in the year in which it becomes due.
2) If the salary paid in arrears has already been assessed on due basis, the same cannot
be taxed again when it is paid.
3) There is no distinction between wages of laborer & salaries of officials.
4) Receipts from person other than employer shall come under the head 'other sources'
even if it is by reason of employment. E.g. Remuneration received by professor of a
college for acting as examiner in the University.
5) Remuneration for services rendered in the past by employee shall be taxable under
'Salaries' (E.g.: Pension).
6) Family pension received by Legal Representative or widow shall fall under 'Income
from other sources' and not under ‘salaries’.
7) Voluntary foregoing of salary due is mere application of Income.
8) Voluntary surrender of salary to the Central Government is excluded in computing
taxable income –Voluntary surrender of salaries (Exemption from Taxation) Act, 1961.
9) In case of Tax-free salary, the employee has to include the tax paid by employer on his
behalf. (Grossing up of salary)
10) Compulsory deductions made by employer also amounts to application of income.
11) Salary of MP is taxable under the head ‘Income from other sources’ as no employer –
employee relationship exists.
12) Salary of a partner from partnership firm is chargeable under 'Profit & Gains of
Business/Profession' and not as salaries in the hands of the partner.
13) Salary grade or Scale of pay or salary scale refers to the yearly increments for every
year of service. – E.g.: Mr A joined on 1-1-2020 on a salary scale of 15,000 – 2,500 –
20,000 – 5,000 – 30,000.
14) Although judges have no employers, they are constitutional functionaries and hence
taxable under salaries. (Privileged Category. Therefore many exemptions)
15) General Rule: When salary falls due on the last day of the month, it will be 12 months
salary from April to March.

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COMPUTATION OF TAXABLE SALARY
1. Basic Salary/ Basic Pay ………………………… xxx
2. Commission (includes all types of commission)..... xxx
3. Bonus (All types of Bonus)……………………… xxx
4. Allowances…………………………….. xxx
Less: To the extent exempt…………… xxx xxx
xxx
5. Perquisites (after proper valuation)……………
xxx
6. Provident Fund………………………………..
xxx
Less: To the extent exempt……………..
xxx
7. Retirement Benefits…………………………… xxx
Less: To the extent exempt……………… xxx xxx
8. Profits in Lieu of Salary… (PILOS)………… xxx
9. Advance Salary…………………………….. xxx
10. Arrears of Salary……………………………. xxx
GROSS SALARY xxx

Less: Deductions u/s 16: -

1. Sec 16(ia) – Standard Deduction 50,000
2. Sec 16 (ii) Entertainment Allowance (govt., employees only) xxx xxx
3. Sec 16 (iii) Professional Tax or Employment Tax (paid) xxx
TAXABLE SALARY xxx

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ALLOWANCES
Allowances can be further classified as:
A – Taxable Allowances (Fully Taxable)
B – Partly Exempt Allowances.
C – Fully Exempt Allowances.

ALLOWANCES
Fully Taxable Partly Taxable Fully Exempt
(i) Entertainment Allowance (i) House Rent (i) Allowances to High
(ii) Dearness Allowance Allowance Court Judges
(iii) Overtime Allowance [u/s10(13A)] (ii) Allowance paid by the
(iv) Fixed Medical Allowance (ii) Special United Nations
(v) City Compensatory Allowance (to Allowances [u/s Organization [UNO]
meet increased cost of living in 10(14)] (iii) Compensatory
cities) Allowance received by a
(vi) Interim Allowance judge
(vii) Servant Allowance (iv) Sumptuary allowance
(viii) Project Allowance granted to High Court or
(ix) Tiffin/Lunch/Dinner Allowance Supreme Court Judges
(x) Any other cash allowance (v) Allowance granted to
(xi) Warden Allowance Government employees
(xii) Non-practicing Allowance outside India being a
(xiii) Transport allowance to citizen of India [Sec
employee other than blind/ deaf and 10(7)] – Foreign
dumb/ orthopedically handicapped Allowances
employee

A. Fully Taxable Allowances:

Following Allowances are fully taxable: -
- Dearness Allowance / Dearness Pay / Additional Dearness Allowance (all types of
DA are fully taxable).
- Medical Allowance.
- Breakfast Allowance, Servant Allowance, Deputation Allowance. [Helper is for
official purposes. Servant is for domestic purposes]
- City Compensatory Allowance (CCA).
- Entertainment Allowance (No exemption, only deduction)
- All Allowances are taxable unless fully or partly exempt.
Medical allowance is always fully taxable whereas medical benefit or facility is entitled
to exemption under perquisites.
B. Partly Exempt Allowances [Based on conditions or limits]: Following are the
allowances that are partly exempt:
1. HOUSE RENT ALLOWANCE (HRA) u/s 10(13A) r/w Rule 2A
- HRA is fully exempt in case of High Court & Supreme Court judges.
- HRA is fully taxable for employees’ living in own house.
- HRA is fully taxable when employee is not paying any rent.
- In all other cases HRA is computed as under: -

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Computation of Taxable HRA:-

Actual HRA xxx

Less: Least of the following exempt u/s 10(13A)
(a) Actual HRA xxx
(b) Rent paid (less) 10% of salary xxx
(c) 40% or 50% (in case of 4 metros) of salary xxx xxx
TAXABLE HRA xxx

Note: -
i) Salary for the purpose of HRA Calculation is as under: -
Salary = Basic + DA if + Commission if Standard Formula
ii) “DA if” refers to DA if it forms part of retirement benefits or if it forms part of terms of
employment or enters into contract of employment or retirement benefits
iii) “Commission if” refers to Commission if it is based on fixed percentage of turnover
achieved by employee.
iv) Salary for the purpose of HRA shall be computed for the period during which rental
accommodation is occupied by employee. Therefore any advance salary received shall not
be considered for HRA calculation.
v) HRA shall be separately computed whenever there is a change in any element of HRA
calculation

Q 28. Mr. VK staying at Madras, working in AS Ltd., receives monthly Rs.12,500 as basic
salary; Rs.3,000 as DA of which 50% is provided in terms of employment and 4% as
commission on turnover achieved by him. He is paid an HRA of Rs. 1,800 per month.
The turnover achieved by him for the year is Rs. 15 Lakhs. House rent paid by him is Rs.
2,500 p.m. He received advance salary of Rs.50,000 in March of the FY relating to the
period April to July of the AY. Determine the taxable HRA. Also determine taxable
salary.
[Hint Ans: HRA=14,400; Taxable Salary=2,60,400]

Q 29. Mr. DG resides at Bangalore, working in Sleeping Beauty Ltd. and drawing a basic
salary of Rs.15,000 p.m. He is paid DA of Rs. 2,500 p.m. provided in the terms of
employment. In addition, he is paid HRA of Rs. 3,000 p.m. and he is entitled to 5%
commission on turnover achieved by him. The turnover achieved by him during the year
is Rs.40 Lakhs. He pays rent of Rs.7,500 p.m. Calculate taxable HRA.
[Hint Ans: HRA=Nil]

Partly exempt allowances (contd…) [Sec.10(14) r/w Rule 2BB]

2. Children education allowance is exempt upto to Rs.100 p.m. per child up to a maximum
of 2 children. [No exemption if it is outside India]
3. Children hostel allowance is exempt upto Rs.300 p.m. per child upto a maximum of 2
children. [No exemption if it is outside India]
4. Transport allowance is exempt upto Rs. 3,200 p.m. for handicaps. It is given for
commuting between office to residence and vice-versa. Transport Allowance is exempt
only for differently abled persons. Transport Allowance is fully taxable for all employees
except for handicaps.
5. Hill compensatory allowance is exempt upto Rs. 300 p.m., if it is in places located at a
height of 1000 mtrs or more above sea level.
6. Running Allowance / Allowance to employees working in Transport systems: - Allowance
to meet his personal expenses while on duty being performed in the course of running of

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such transport from one place to another is exempt upto 70% of such allowance or
Rs.10,000 p.m. whichever is less. Exemption is available only if employee is not receiving
daily allowances.
7. Tribal area allowance is exempt upto Rs 200 per month in specified areas.
8. Underground allowance is exempt upto Rs 800 per month (Eg: Mines).
9. Special allowances in the nature of high altitude allowance, snow bound area allowance,
avalanche allowance, border area allowance, remote area allowance etc.
In all such cases the amount of exemption differs from place to place and conditions.

Note:
1. The amount of Exemption cannot exceed income itself.
2. Salary cannot have a loss
3. CEA
a) Case 1:
CEA Received 500 x 12 x 3 18,000
(-) Exempt 100 x 12 x 2 2,400
15,600
b) Case 2:
CEA Received 75 x 12 x 2 1,800
(-) Exemption limited to 75 x 12 x 2 1,800
0
c) Case 3
Total CEA for 2 children is Rs. 240 per month:
Child 1 – Rs. 160 per month
Child 2 – Rs. 80 per month

Child 1:
CEA Received 160 x 12 x 1 1,920
(-) Exempt 100 x 12 x 1 1200
720
Child 2:
CEA Received 80 x 12 x 1 960
(-) Exempt 80 x 12 x 1 960
0

Fully exempt Allowance

1. Foreign allowance: Section 10 (7) – Any allowance paid outside India by the Government
to an Indian citizen for rendering service outside India is fully exempt e.g.: Overseas
allowance, EA, children education allowance, car allowance etc. Therefore exempt for
government employees only.
2. Allowance to High Court and Supreme Court Judges – High Court Judges (Conditions of
Service) Act, 1954; similarly Supreme Court Judges (Conditions of Service) Act, 1958.
3. Allowance from UNO – u/s 2 of United Nations (Privileges & Immunities) Act, 1974.
(Note: - Salary received from UNO not taxable in India.)
4. Special allowance exclusively incurred in the performance of official duties is fully
exempt U/s 10(14) to the extent of actual amount spent like travel allowance,
conveyance, helper, research, uniform allowance, daily allowances also called per diem
allowance.

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Q 30. Mr. AK is in receipt of the following allowances and seeks yours advice about the
taxable quantum of these allowances: -
1. Helper allowance for the entire year at Rs.300 p.m. was received whereas he had
appointed a helper for 9 months during the year to whom he paid Rs.200 p.m.
2. Conveyance allowance of Rs.750 p.m. He owns a car, which is used both for personal
purposes and official purposes. Total monthly expenses amounts to Rs.1200 of which
40% is attributable towards official use.
3. During the year he received Education and Hostel allowance for his 3 children, a sum
of Rs.500 per child p.m. towards education and hostel expenditure. All the children
are staying in hostel.
4. During the year for six months he was posted at Khandala, a hilly area located at a
height of 1,200 mts above sea level. Hill compensatory allowance of Rs.2,400 has
been received by him for such period.
[Hint Ans: 14,040]

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PERQUISITES – Section 17(2) and Rule 3

It is the non- monetary benefit provided or facilities rendered to an employee. It can be

classified into three categories as under:
I. Perquisites taxable in all cases [u/s 17(2)(i) to 17(2)(viii) except 17(2)(iii)]
II. Perquisites not taxable [proviso to Sec 17(2) read with Rule 3 and 3A]
III. Perquisites taxable only in the hands of specified employees 17(2)(iii).

I. Perquisites Taxable in all cases: (Taxable for all employees)

1. Rent Free Accommodation (RFA) - Sec 17(2) (i).
2. Value of accommodation provided at concessional rent- Sec 17(2) (ii).
3. Obligation of employee met by the employer- Sec 17(2) (iv) [Expenses/ Taxes of
employee paid by employer]
4. Any sum payable by the employer to effect insurance on the life of employee- Sec
17(2)(v).
5. ESOP or SES free of cost or at concessional rate transferred to the asseessee directly or
indirectly- Sec 17(2)(vi)
6. Amount of any contribution to approved super annuation fund by the employer to the
extent it exceeds Rs 7.50 lakhs - Sec 17(2)(vii)
7. Value of prescribed fringe benefits or amenities like- Sec 17(2)(viii):
(i) Interest free or concessional loans [Rule 3(7)(i)]
(ii)Traveling, touring, accommodation (ie, holiday homes) [Rule 3(7)(ii)]
(iii) Free food [Rule 3(7)(iii)]
(iv) Gifts [Rule 3(7)(iv)]
(v) Credit card facilities [Rule 3(7)(v)]
(vi) Club facilities [Rule 3(7)(vi)]
(vii) Use of movable assets [Rule 3(7)(vii)] – (possession)
(viii) Transfer of movable assets [Rule 3(7)(viii)] – (possession and ownership)

II. Perks not taxable [Based on limits or conditions]:

1. Medical Benefits [proviso to Sec 17(2)]:-
i. Employer’s hospital: Medical facility provided in a hospital, clinic etc maintained by
employer is not taxable.
ii. Government Hospital: Reimbursement or direct payment of expenses incurred in any
hospital maintained by government, local authority or approved hospitals (approved by
Govt/CCIT/CIT) is not taxable.
iii. Prescribed disease: Reimbursement or Direct payments made by employer to hospitals
approved by Chief Commissioner towards treatment of prescribed diseases (given in
Rule 3A like cancer, TB, AIDS, disease of the heart, blood, liver etc requiring surgical
operation) is not taxable. Covid also covered as exempt perquisite.
iv. Premium on mediclaim policy: Group medical insurance or medical insurance premium
is not taxable. (Mediclaim is not taxable)
v. International / Foreign: Medical treatment outside India including cost of stay outside
India to the extent permitted by RBI is not taxable.
vi. Expenses on travel abroad with one attendant is also not taxable if the Gross Total Income
does not exceed Rs. 2,00,000 (without considering this travel expenses.)
If the bills are in the name of employee the taxable portion will be taxable for all cases.
However, if the bills are in the name of employer but facility provided to employee then the
taxable portion will be taxable only for specified employees.

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Family: This facility can be provided to employee or his family members (i.e., spouse &
children, and includes parents, brothers, sisters, if mainly dependent on him)
Example Family MIL (Mother in Law)
Government Hospital Exempt Taxable

Q 31. From the following information find out taxable salary of Mr. FTP who is employee in
ITC for the current assessment year:
i. Basic Salary Rs. 3,95,000
ii. Medical expenditure directly paid by the employer to Private Practitioner Rs. 25,000
iii. Medical expenditure directly paid by the employer to hospital approved by CCIT Rs.
50,000
iv. Reimbursement of medical expenses incurred by the employee in a hospital Approved
by CCIT Rs. 10,000
v. Expenditure on traveling abroad (including attendant) borne by employer Rs.1,00,000
vi. Expenditure incurred on treatment abroad borne by employer Rs. 1,50,000 (Out of
this amount RBI granted permission for Rs. 1,00,000)
[Hint Ans: Rs.5.20 Lakh]

Q 32. Ms. Rakhi is an Employee in a Private Company. She receives the following Medical
Benefits from the Company during the Previous Year.
Particulars Amount
1. Reimbursement of following Medical Expenses incurred by Ms. Rakhi.
(A) On treatment of her Self Employed Daughter in a Private Clinic. 4,000
(B) On treatment of herself by Family doctor 8,000
(C) On treatment of her Mother-in-Law dependent on her, in a Nursing Home 5,000

2. Payment of premium on Mediclaim Policy taken on her health. 7,500

3. Medical Allowance 2,000 p.m
4. Medical Expenses Reimbursed on her Son’s treatment in a Government Hospital 5,000
5. Expenses incurred by Company on the treatment of her minor son abroad. 1,05,000
6. Expenses in relation to Foreign Travel and Stay of Rakhi and her son abroad for 1,20,000
Medical Treatment
(Limit prescribed by RBI for this is Rs.2,00,000)
Discuss about the taxability of above benefits and allowances in the hands of Ms.Rakhi.
[Hint Ans: Rs.41,000] (May 2014-8M)

Note:
 Expenses on treatment abroad with stay is Rs.1,05,000 plus 60,000 (50% of
1.20Lakhs) Which is less than RBI Limit.
 It is assumed that Rs.1.20L is divided equally @ 50% towards expenses on travel
and 50% towards stay.
 It is assumed that her GTI does not exceed 2 lakhs

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Perks not taxable [Based on limits or conditions] contd…
2. Refreshments to all employees during working hours in office premises is not taxable.
3. Recreational facilities is not taxable.
4. Training of employees or fees paid for refresher management course is not taxable.
5. Premium on personal accident policy is not taxable.
6. Foreign perks allowed outside India by the Govt. to a citizen of India for rendering services
outside India. Sec. 10(7) is not taxable. [Not taxable for government employees only]
7. RFA to High Court & Supreme Court Judges, RFA to officials of parliament.
8. Conveyance facility provided by employer between residence and office is not taxable.
9. Telephone bills and Mobile Bills - It is not taxable even if the telephone is partly used for
household requirements of employee.
10. Goods (manufactured by Employer) sold to his Employees at a concessional rate. If it is
free, it is treated as Gift under fringe benefits.
11. Tax paid by employer on value of perquisites on behalf of employee shall not be included
in the income of the employee u/s 10(10CC). Apply average rate of tax based on tax
payable on salary. Further, as per Section 40(a)(v), such income tax paid by employer is
not deductible while computing business income of employer. All taxes paid by employer
on behalf of employee is always taxable being obligation of employee met by employer
except tax on perquisites.
12. Traveling facility to employees of railways or airlines is not taxable

III. Perks taxable only in the hands of specified employees:

Specified employee means (3 criteria - SSI): - (Any one criteria to be satisfied)
1) Status: Director employee-full time or part time-director for whole or part of a year.
2) Shareholding: Employee having substantial interest in the company i.e., not less than
20% voting powers in the company.
3) Income: Employee whose Income under the head salaries exceeds Rs. 50,000 for the year
excluding value of Non-monetary benefits, Employers contribution to P.F. and after
allowing deductions u/s 16 (Aggregate from all employers) [Rs. 50,000 excludes
Perquisites, PF and deductions u/s 16 (16(ia)-Standard Deduction; 16(ii) – Entertainment
Allowance; 16(iii) – Professional Tax)]

Following perks are taxable in the hands of specified employees: -

1) Motor car
2) Domestic servants, sweepers, watchman & gardener
3) Gas, electricity & water supply
4) Education Facility
5) Medical Facility
6) LTC exceeding exemption limit u/s 10(5)
7) Any other perquisites

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VALUATION OF PERQUISITES
Perquisites Taxable in all cases
I. Rent Free Accommodation (RFA)

Category A – Government Employees (Central / State Government but excludes employees

of Local Authority or Foreign Government)
RFA = License fee as per government rules
Irrespective of salary of employee, FRV, market price etc.

Category B - Other Employees if accommodation is owned by employer in a place where the

population:-
 exceeds 25 Lakhs : ……………..…………… RFA = 15% of Salary

 exceeds 10 Lakhs but not exceeding 25 Lakhs: ….. RFA = 10% of Salary

 Any other place :…………………………………..

RFA = 7.5% of Salary

Category C - Lease or rent - If accommodation is taken on lease or rent by employer

RFA = Rent Payable or 15% of Salary whichever is less irrespective of population

Category D - Dual Accommodation on transfer - In case of transfer of employee from one

place to another, if accommodation provided at new place of posting while retaining the
original place is taxable as under:
(a) Lower of values of perquisites of RFA upto a period not exceeding 90 days
(b) After 90 days, both are chargeable as perquisite.

Category E – Exemption for Mining site - An employee working at a mining site or an

onshore /offshore site or project execution or dam or power generation site is not taxable
(being of a temporary nature and having plinth area not exceeding 800 square feet, is located
not less than eight kilometers away from the local limits of any municipality or a cantonment
board or in remote area)
(Remote area refers to an area 40 kms away from any town having population not exceeding
20,000).

Category F - Furnished RFA (FRFA) - For the above values of unfurnished RFA (add) 10%
p.a of original cost of furniture or / & actual hire charges (rent) payable by employer.
Note: 10% is p.a. Therefore, if furniture is provided for a lesser period, then proportionate
amount is taxable.
If furniture is owned by employer – Take 10% of Original Cost
If furniture is hired by employer – Take 100% of Hire Charges (Rent)

Category G - Hotel Accommodation (including service apartments, guest house or motel) –

(i) Applicable to both Government and other employees
(ii) Perquisites = 24% of salary or Actual charges payable to hotel whichever is less.
(iii)This perquisite is not taxable if the accommodation period does not exceed in aggregate
15 days on his transfer from one place to another. [Eg: If provided for 16 days, entire 16
days is taxable]
(iv) If employer provides guest house for official stay, it is not taxable

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NOTE:
1) Salary for RFA = Basic + DA if + ABC + any monetary payments like leave
encashment, pension, fees, annuity etc., but excludes PF contribution and Perquisites.
A = All allowances other than DA (taxable portion)
B = Bonus
C = Commission (All Commission)
2) Salary shall be considered for the period during which RFA was provided. (Therefore,
exclude advance salary)
3) Salary from all employers shall be considered for the period during which RFA is
provided.

Q 33. X is a joint secretary in the Ministry of Home affairs. During the previous year he has
been allotted a RFA at New Delhi. Though the License fee of the flat as per Government
rule is Rs.1,200 p.a., its fair rental value is Rs.12,000 p.a. Determine the value of RFA on
the assumption that salary of ‘X’ is:
(a) 96,000 p.a. (b) 1,12,000 p.a.

Q 34. Two Officers of Air India Mr. X (Basic 72,000 + Bonus 7,200) and Mr. Y (Basic 40,000
+ Bonus 4,000) have been allotted identical flats of the same area at Chennai. FRV of each
flat is Rs.6,000. Determine the value of RFA in the hands of X&Y
[Hint Ans: X=11,880; Y=6,600]

Q 35. Mr. SK, an employee of AR ltd. gets Rs.60,000 as basic,

Rs. 6,000 as commission; 4,000 as Bonus, Rs.6000 as Uniform allowance (60% spent for
uniform), Rs.12,000 as conveyance Allowance (75% utilised for official purpose) and EA
Rs.9,000. A RFA is provided at a place where population is (a) > 25 L (b) < 4 L .Determine
the value of RFA.
[Hint Ans: 12,660; 6,330; salary for RFA – 84,400]

II. Value of Accommodation provided at concessional Rent

Value of RFA xxx

Less: Rent payable by employee / Amount recovered from employee xxx
Value of Accommodation provided at concessional Rent xxx

Q 36. Solve the above problem assuming Rent recovered from employee was Rs.100 per
month for the full year.

III. Obligation of Employee met by employer:-

1. Perquisite = Amount spent by employer, minus the amount recovered from
employee.[Sec.17(2)(iv)]
2. Expenses/Taxes of employee paid by employer is taxable except tax on
perquisites which is exempt u/s 10(10CC)

IV. Valuation of Employee Stock Option Plan (ESOP) / Sweat Equity Shares (SES)
[Sec.17(2)(vi)]
1. ESOP means any specified securities or SES allotted or transferred by the
employer (present or former) to the employee, directly or indirectly, either free of
cost or at a concessional price.

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2. Value of ESOP = FMV (Fair Market Value) of securities / SES as on date of
exercise of option (less) amount recovered from employee.
3. Option means a right but not an obligation granted to an employee to apply for
securities / SES at a pre-determined price.
4. FMV shall be determined as follows:
a. Shares of unlisted company or securities not being shares:
FMV = As determined by merchant banker on specified date (Registered Valuers)

b. Shares of listed company:

FMV = Average of opening and closing price on date of exercise of option in
the stock exchange that records highest volume of trading
c. Shares of listed company if no trading on date of exercise of option
FMV = Closing price on the date closest and immediately preceding the date
of exercise of option in the stock exchange that records highest volume of
trading

Q 37. AB Co. Ltd. allotted 1000 sweat equity shares to Sri Chand . The shares were allotted
at Rs.200 per share as against the fair market value of Rs.300 per share on the date
of exercise of option by the allottee viz. Sri Chand. The fair market value was
computed in accordance with the method prescribed under the Act.
(i) What is the perquisite value of sweat equity shares allotted to Sri Chand?
(ii) In the case of subsequent sale of those shares by Sri Chand, what would be the
cost of acquisition of those sweat equity shares?
Answer
(i) As per section 17(2)(vi), the value of sweat equity shares chargeable to tax as
perquisite shall be the fair market value of such shares on the date on which the
option is exercised by the assessee as reduced by the amount actually paid by, or
recovered from, the assessee in respect of such shares.
Particulars Amount
Fair market value of 1000 sweat equity shares at Rs.300 each 3,00,000
Less: Amount recovered from Sri Chand 1000 shares at Rs.200 each 2,00,000
Value of perquisite of sweat equity shares allotted to Sri Chand 1,00,000
(ii) As per section 49(2AA), where capital gain arises from transfer of sweat equity
shares, the cost of acquisition of such shares shall be the fair market value which
has been taken into account for perquisite valuation under section 17(2)(vi).
Therefore, in case of subsequent sale of sweat equity shares by Sri Chand, the cost
of acquisition would be Rs.3,00,000.

V. PRESCRIBED FRINGE BENEFITS OR AMENITIES:

1. Interest free Loans / Concessional Interest: -
(a) It may be provided to Employee or member of household (i.e., spouse(s),
children & their spouses, parents, servants & dependents)
Perquisite = Rate of interest p.a. as given by SBI as on 1 st April of every financial year
(b) In case of Concessional loans:
Perquisite = Value as above (less) Interest recovered from Employee
(c) Interest is calculated on maximum outstanding monthly balance at the end of
each month.
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(d) Exceptions: i.e., Not taxable
i. Loan given for treatment in respect of specified diseases (given in Rule 3A
like cancer, TB, AIDS, disease of the heart, blood, liver etc requiring surgical
operation)
ii. Petty loans not exceeding in the aggregate Rs. 20,000. [If loan is 21,000, then
interest on entire loan of Rs.21,000 is taxable]

2. Traveling, Touring, Accommodation (holiday homes):

a. Employee or member of household:
Perquisites = Expenses incurred by employer – Amount Recovered
b. If holiday homes are maintained by employer:
Perquisite = value offered by other agencies to public
c. If Employee is on Official tour and any member accompanies him then:
Perquisite = expenses incurred on such member
d. If Official tour is extended as vacation then:
Perquisite = Expenses incurred on extended period

3. Free meals: -

Perquisite = Expenses incurred by employer (less) recovered from employee

Exceptions: - i.e., Not taxable
i. Refreshments during working hours
ii. Free meals in remote area or off-shore installation
iii. Free meals in office premises or outside through paid vouchers if value in
either case is upto Rs.50 per meal. [If number of working days is not given,
assume 300 days. Therefore, Rs.15,000 p.a is not taxable (50 x 300).
Balance is taxable]. However, alternate view is to tax the entire amount if it
exceeds Rs. 50 per meal without deducting Rs. 15,000 p.a.

4. Gifts/ Vouchers/ Tokens

a. Received by employee or member of household
Perquisite = Value of the Gift
b. It is taxable whether it is given on ceremonial occasions or otherwise
c. No exemption for cash gifts or gift cheques.
Example: The employer provides a cash gift/gift cheques of Rs.3,000 to X.
Ans: Rs.3,000 being a cash gift/gift cheque, is chargeable to tax.
d. Exception: - i.e. not taxable, if value of the gift is below Rs. 5,000 in the
aggregate for the year.
Note: Cash Gift is always taxable irrespective of value. However, Gift in kind is not
taxable below Rs.5,000.[If gift is Rs.6,000, entire Rs.6,000 is taxable]

5. Credit Cards: -
a. Employee or Member of household
Perquisite = Expenses incurred (less) amount recovered
b. Credit Cards include add-on cards.
c. Exception: i.e., not taxable if incurred for official purpose and complete
details of expenses and nature is maintained and certified by employer.

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6. Club Facilities:
a. Employee or Member of household
Perquisite = Expenses incurred (less) amount recovered
b. Exception: i.e., not taxable if
(i) Initial fee paid by employer on acquiring corporate membership.
(ii) If used for official purpose and complete details of expenses and nature is
maintained and certified by employer.
(iii)It is not taxable for use of health clubs, sports and similar facilities if
uniformly provided to all employees.

7. Use of Movable Assets (Possession): -

i. Employee or Member of household.
Perquisite= 10% p.a of actual cost or/ and actual rent/Hire charges payable
by employer, as the case may be (less) amount Recovered
ii. If not given for full year, then the proportionate value should be considered.
iii. Exception: i.e., it is not taxable for the use of computers and laptops.

8. Transfer of movable assets (Possession and Ownership):-

(a) Employee or member of household.
(b) In case of computers and electronic items (like data storage devices, digital
diaries, and printers, but, excludes household appliances like washing machine,
microwave ovens, mixers etc)
Perquisite = Actual cost (less) 50% depreciation under WDV method
(c) In case of Motor cars:
Perquisite = Actual Cost (less) 20% depreciation under WDV method
(d) In case of Other Assets (including household appliances):
Perquisite = Actual Cost (less) 10% depreciation under SLM method
(e) For above values of perquisite reduce amount recovered.
(f) Depreciation is calculated for each completed year.

Summary

Asset Depreciation Rate Method

Computers 50% WDV
Motor Cars 20% WDV
Other Assets 10% SLM

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Perquisites Taxable in the hands of Specified Employees:
1. Motor Car
S. Car owned/ Expenses Wholly Wholly personal Partly personal use
No. hired by met by official use use
1 Employer Employer Not a Therefore CC of Perquisite
Perquisite perquisite = engine value
Expenses +10% (Irrespective
of Original Cost of amount
spent by
employer)
Upto 1.6 Rs.1,800 p.m
litres
(Small
Car)
Above Rs.2,400 p.m
1.6 litres
(Big
Car)
If chauffer (Driver) is
also provided, Rs.900
p.m should be added to
the above value.
2 Employee Employer Not a Actual amount of Perqs = Expenses by
perquisite expenditure Employer minus 1800pm
incurred. (small cars) or 2400pm
(big cars)
3 Employer Employee Not a 10% of Original Upto 1.6 litres (Small
perquisite Cost or hire Car) Rs.600 p.m
charges. Above 1.6 litres (Big
Car) Rs.900 p.m
[Use of movable If Chauffeur is also
asset] provided, Rs.900 p.m
should be added to the
above value.

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STAR POINTS TO NOTE:
1. Used by employee or Member of household.
2. Month = Completed Month (all the above stated amounts shall be per month)
3. Where the employee uses a pool of cars then even if one is more than 1600CC in the
pool of cars Perquisite shall be valued for the higher car.
4. If the employee and member of household are provided with more than one car, then any
one car at his option is treated as partly official, partly personal and the remaining cars is
treated as fully personal.
5. Use of motor car from office to residence and vice versa is not taxable.
6. Conveyance facility to High Court and Supreme Court Judges is not taxable.
7. Where the perquisite is valued on a predetermined amount (i.e., flat amount), no
adjustments shall be done even for any amount recovered from employee, whereas in all
other cases value the motor car perquisite as above (less) amount recovered.
8. 1600CC car is the same as 1.6 lts. Cubic capacity of engine or 16HP.
9. If car facility is provided along with driver add Rs 900 for the above mentioned values.

2. Domestic Servants, Sweepers, Watchman and Gardener: -

(a) If appointed by employee and salary is paid /reimbursed by employer it is taxable
in all cases being obligation of employee met by employer.
(b) If appointed by employer (taxable only for a specified employee):

Perquisite = Actual Expenses incurred (less) amount recovered

3. Gas, Electricity, Water supply:

(a) If the connection is in the name of employee and bills paid or reimbursed by employer
it is taxable in all cases being obligation of employee met by employer.
(b) In other cases (taxable only for a specified employee):
Perquisite = Expenses incurred (less) amount recovered
(c) If supplied from own source (taxable only for a specified employee):

Perquisite = Manufacturing cost per unit i.e., Actual Expenses(less) amount recovered

4. Education Facility:
(a) Training of Employees - Not a taxable Perquisite.
(b) If education facility is given to children by way of children education allowance
then it is partly taxable allowance u/s 10(14). CEA is exempt upto Rs. 100 p.m per
child upto a maximum of 2 children
(c) School fees paid or reimbursed is taxable in all cases being obligation of employee
met by employer. Mere payment for education of employee children is taxable
(d) If Educational Institution is owned by Employer or Education facility provided by
reason of employment (taxable only for a specified employee).

Perquisite = Cost of such education in similar institution (less) Amount recovered

(e) Exception: i.e., Not taxable in above case if cost of education does not exceed Rs.
1,000 p.m. per child in respect of children of employee. Therefore, if education
facility is provided to member of household the entire amount is taxable without the
exemption limit of Rs. 1,000 p.m. Further, in case the cost exceeds Rs 1,000 p.m.
per child, the entire amount is taxable as perquisite as held in ITO V/s. Director,
Delhi Public School (2007) (Delhi-Tribunal).

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5. Medical Facility:
(a) If the bills are in the name of employee and paid by employer then taxable in all
cases being obligation of employee met by employer (subject to the medical
facility not taxable)
(b) In other cases it is taxable in the hands of specified employees subject to
medical facility not taxable.

6. Leave Travel Concession: - LTC or passage money exceeding exemption limit u/s
10(5) is taxable.
i. Exemption available to Indian as well as foreign citizens
ii. Exemption available if travel is in connection with his proceeding on leave to
any place in India or in connection with his proceeding after
retirement/termination of service to any place in India.
iii. The amount of exemption shall in no case exceed the actual expenditure incurred
on such travel. Rule 2B r/w sec 10(5)
iv. Exemption is available in respect of 2 journeys performed in a block of 4 calendar
years commencing from 1986. (1986-89, 1990-93, …., 14-17, 18-21).
v. In a block, if LTC is not fully availed (i.e. availed one or none) then LTC availed
during 1st calendar year of next block shall be exempt for one journey only, as if
belonging to previous block.
vi. LTC available to employee & family members (spouse & children, and includes
parents, brothers, sisters, if mainly dependent on him). However, exemption is not
available to more than two children of the employee, born after October 1, 1998.
However, this restriction does not apply in respect of children born before October
1, 1998 and in respect multiple births after one child.
vii. The amount of exemption depends upon different situations as under:
Amount exempt (limited to actual
Different Situations
amount spent)
If Journey is by Air Economy fare of National Carrier by shortest
route
If Journey is by rail A/C first class - rail fare by shortest route
Journey not by rail but rail facility A/C first class - rail fare by shortest route
available
No rail facility available but recognized First class/deluxe class fare by shortest route
public transport exists
No rail facility & no recognized public A/C first class – rail fare as if rail facility
transport existed

7. Any Other Perquisite: -

Perquisite = Expenses incurred (less) Amount Recovered
Q 38. Mr. Kantharaj, an employee of the ABC (P) Ltd receives the following salary and
perquisites from his employer, during the FY. Compute his taxable salary
a) Basic Pay Rs. 15,000 per annum
b) Profit Bonus Rs.4,500 per annum
c) Commission on sales at 2% of Turnover (turnover for the year achieved is Rs.4.5L)
d) Advance salary of April and May of next FY Rs.12,500
e) Travelling allowance Rs.300 (at Rs.100 pm from Jan to Mar) which is fully utilized
for official purpose.
f) A rent free furnished house in village (rent of unfurnished house paid by employer
Rs.18,550)
g) Rent of furniture Rs.13,500
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TAXATION – FY 2022-23 – Intermediate
h) Free services of cook (salary Rs.7,200).
i) Free services of watchman (salary Rs.3,600)
[Hint Ans: RFA - 17,775; RFA = 15% or Rent; TS – 8,775]

Note:
1. Not a Specified Employee
2. Advance Salary
3. RFA
4. Cook and watchman

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PROVIDENT FUND
There are four categories of Provident Fund:
1. Statutory Provident Fund [SPF]
2. Recognized Provident Fund [RPF]
3. Unrecognized Provident Fund [URPF]
4. Public Provident Fund [PPF]
PF Employers Employees Interest Lump sum
Contribution contribution
(Personal
savings)
SPF E 80C E E
RPF Excess of 12% 80C Excess of 9.5% E
is taxable is taxable
URPF - - - Divided into
4 parts
PPF - 80C E E

I. Statutory Provident Fund:

a) Employer’s contribution - Fully Exempt
b) Employees contribution - Entitled to Deduction u/s 80C
c) Interest credited - Exempt from tax
d) Lumpsum received - Exempt from tax
II. Recognised Provident Fund:
i. Employer’s Contribution - Excess of 12% of salary is taxable
[Salary = Basic + DA if + Com if]
ii. Employees Contribution - Entitled to Deduction u/s 80C
iii. Interest credited - Excess of 9.5% interest is taxable
(Notification No.24/2011 dated 13/05/2011).
iv. Lumpsum received - Exempt upon satisfying the conditions like 5 years of
accumulated balance before withdrawal or termination of service due to ill-health,
beyond control of employee, transfer entire balance to NPS, transfer of account to
next employer, closure of business of employer, etc. [Sec.10(12)] If conditions are
not satisfied, it shall be taxable as if the fund was URPF from the beginning.
Any amount received from PPF /SPF is exempt u/s 10(11)
III. Unrecognized Provident Fund:
a. Employers Contribution - Not taxable
b. Employees Contribution - No Deduction
c. Interest credited - Not taxable
d. Lumpsum received - It shall be divided into four parts:
i) Employers Contribution - under Salaries
ii) Interest on Employers Contribution thereon - under Salaries
iii) Employee Contribution – Not taxable
iv) Interest there on - Taxable as Income from Other Sources.

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IV. Public Provident Fund:
a. Employer Contribution - No Employers Contribution
b. Employee Contribution - Entitled to Deduction u/s 80C
c. Interest credited - Exempt from tax
d. Lumpsum Received - Exempt from tax

Q 39. The following are the particulars of an employee:

 Basic Salary of Rs.15000 per month (180000).
 Bonus Rs.6000.
 DA Rs.1800.
 Employers Contribution to PF 22000
 Employee’s contribution to PF Rs.22000
 Interest on PF @15 % Rs.2400
Show the tax treatment if the contribution is towards RPF.

Q 40. [RTP Nov 2012]

Mr. Rupesh is the Finance Manager of Vaibhav Construction Pvt. Ltd. and he is in receipt of
the following emoluments from his employer. Compute his taxable salary for the FY
Particulars Rs.
th
Basic Salary Up to 30 September 28,000 p.m.
st 35,000 p.m.
From 1 October
D.A. (forming part of retirement benefits) 16,000 p.m.
Transport allowance 2,800 p.m.
Employer’s contribution to recognised provident fund (R.P.F.) 18% of basic
salary and dearness
allowance
Interest credited to recognized provident fund @10% 40,000
Children education allowance (total p.m.) 240 p.m. (See
Note below)
Entertainment allowance 450 p.m.
Hostel expenses allowance (total p.m.) 600 p.m. (See
Note below)
Tiffin allowance 7,500 p.a.
Professional tax paid (Out of 3,200, a sum of Rs 2,500 was 3,200
paid by his employer)
Note: Children education allowance and hostel expenditure allowance have been given
for two children of Mr. Rupesh, aged 16 years and 14 years, in accordance with the
policy of the employer. As per the said policy, the eligible children education allowance
and hostel expenditure allowance in respect of an employee’s child above 15 years of
age would be double the eligible children education allowance/hostel expenditure
allowance, as the case may be, in respect of an employee’s child up to 15 years of age.
[Hint Ans: CEA=720; CHA=1200; PF=34,200; TS – Rs.6,03,920]

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Section Amendments
10(11) & Interest accrued on Employees Contribution to EPF & PPF
10(12)
Interest accrued on Taxability
Employer also Contributions < 2,50,000/- in PY Fully Exempt
Contributes
Income on contributions
Contributions > 2,50,000/- in PY
> 2,50,000 is taxable
No Employer Contributions < 5,00,000/- in PY Fully Exempt
Contribution
Income on contributions
[PPF] Contributions > 5,00,000/- in PY
> 5,00,000 is taxable

Sec 17(2)(vii) – Aggregate contribution exceeding 7.5L in a PY is taxable. Aggregate of

RPF + NPS + Approved superannuation fund.

Sec 17(2)(viia) – Annual accretion by way of interest/dividend or any other amount received
in PY on such amount which is taxed as perquisite u/s 17(2)(vii)

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RETIREMENT BENEFITS
[Gratuity; Commuted Pension; Leave Salary; Retrenchment Compensation;
Voluntary Retirement Scheme]
Note: Fully exempt for government employees on retirement
Gratuity – Section 10(10)
Computation depends on the category of employee:
1. Government employees
2. Employees covered under Payment of Gratuity Act 1972. [POGA]
3. Other Employees
I. Government Employees: - Fully exempt (Government Employees include Central
Govt., State Govt., Local authority but not employees of statutory corporation)
II. Employees covered by the Payment of Gratuity Act, 1972: -
Actual Gratuity …………………………………………… xxx
Less: Least of the following exempt u/s 10(10)(ii)
(i) Actual Gratuity ………………………………………… xxx
(ii) Ceiling limit …….
20,00,000
(iii) 15/26 x Last drawn salary x Number of years of service
(rounded off if > 6 months) …………………………… xxx xxx
TAXABLE GRATUITY xxx
[Salary = Basic + All DA] (Any DA to be taken, i.e., DA If or only DA)
III. Other Employees: -Computation of taxable gratuity:
Actual Gratuity……………………………………………… Xxx
Less: Least of the following exempt u/s 10(10)(iii)
(i) Actual Gratuity ………………………………………… xxx
(ii) Ceiling limit …..
20,00,000
(iii) ½ x Average salary x Completed years of service ………
TAXABLE GRATUITY xxx
xxx
xxx

Salary = Basic + DA if+ Commission if

Star points on Gratuity:

1. Average salary refers to average of salary of last 10 months preceding the month of
retirement.
E.g.: If an employee retires on 30th November last 10 months would mean January to
October i.e., excluding November being the month of retirement.
2. Gratuity received while in service is fully taxable. [Taxable even for a government
employee]
3. If gratuity is received from 2 or more employers, then the limit of Rs 20,00,000 will be
reduced by the amount of gratuity exempt from tax in any earlier year.
4. If Gratuity is given on death of employee & received by legal heir, it is not income. Hence,
not taxable.

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PENSION

Commuted Pension/Commutation of Pension (Exempt u/s 10 (10A):

i. Uncommuted Pension (UCP) refers to Pension periodically received by the
Employee after his retirement and it is taxable as salary u/s 15 in the hands of both
Government and Non-Government employees. Therefore monthly pension is always
taxable. UCP is always taxable [UCP = Monthly Pension = Always Taxable].
Similarly, any contribution by employer to NPS is taxable as salary. Subsequently, ch
VIA deduction can be claimed u/s 80CCD(2) subject to limits.
ii. Pension from UNO is not taxable
iii. Commuted Pension (CP) means lumpsum payment in lieu of periodical payments
wherein either the whole/part of the pension is commuted.

Commuted Pension is entitled to exemption U/s 10(10A) as under:

1. Government Employee (CG, State Government, Local Authority and Statutory
Corporation) - wholly exempt.
2. Judges of High Court and Supreme Court – wholly exempt (Circular No.623 dt 6.1.92)
3. Other employees who do not receive gratuity
Exemption = 1/2 of 100% Commuted Pension
4. Other employees who also receive gratuity
Exemption = 1/3 of 100% Commuted Pension
Computation of Taxable Pension
1. Uncommuted pension (UCP) before commutation … xxx
2. Uncommuted pension (UCP) after commutation …… xxx
3. Commuted pension (CP) received ………………… xxx
Less: Exempt U/s 10(10A) ……………………………… xxx xxx
TAXABLE PENSION xxx
On the death of employee, family pension given is taxable in the hands of the legal
heir under the head ‘Income from other sources.
Q 41. Mr. T employed in a Pvt. Co. retires on 30th July of PY. He is paid a pension of
Rs.6,000 p.m upto January of PY. On 1st February, he commutes 75% of his pension and
receives Rs.1,20,000. Calculate taxable pension.
[Hint Ans: 79,000]

Leave Salary/Encashment of Earned Leave u/s10 (10 AA)

1. Leave Encashment while in service – Fully Taxable.
2. Leave Encashment at the time of retirement or leaving the job is exempt u/s 10(10AA) as
under:
(i) Government Employees - State Government/CG – received at the time of
retirement or leaving the job: Fully exempt.
(ii) Other Employees (Including local authority or Public Sector Undertaking):

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Computation of Leave Salary:
Leave Salary Received ……………………………… xxx
Less: Least of the following exempt u/s 10(10AA)
(a)
Actual leave salary received ………………………. xxx
(b)
Ceiling Limit ……………………………………………
300,000
(c)
Average Salary x 10 ………………………………………
(d)
Average Salary x leave to his credit (based on not more than xxx
30 days leave for each completed year of service) xxx xxx
TAXABLE LEAVE SALARY
xxx
1. Salary for the purpose of Leave Salary
Salary = Basic + DA if + Commission if
2. Average salary refers to average of last 10 months upto retirement. Therefore if an
employee retires on 15th November, last 10 months will be from 16th January to 15th
November.
3. If received from 2 or more employers either in the same year or different years the limit
shall not exceed the ceiling limit in the aggregate. (ceiling limit of Rs. 3,00,000 will be
reduced by the amount of exemption of any earlier year)
4. Leave to his credit = Leave entitlement – leave taken

Q 42. Mr. X, an employee of Y Ltd receives Rs.80,000 as leave salary at the time of his
retirement on Feb 28. Average salary drawn during last 10 months is Rs.3,000. Last drawn
salary is Rs.3,200. Duration of service is 24 years and 7 months, leave taken while in
service is 9 months. Leave entitlement as per employer’s rules is 1½ months for each
completed year of service. Calculate taxable leave salary. [Hint Ans: 50,000]

Retrenchment Compensation u/s 10 (10 B)

Actual Amount Received ………………………………… xxx
Less: Least of the following exempt u/s 10(10B)
(a) Actual amount received ………………………………… xxx
(b) Ceiling Limit ……………………………………………
500,000
(c) 15/26 x Average salary of last 3 months x No. of years of
service (Round off if more than 6m) xxx xxx
TAXABLE RETRENCHMENT COMPENSATION xxx

The Retrenchment Compensation shall be fully exempt if it is paid under an approved

scheme of Government to give special protection to workmen under certain
circumstances.
Salary for the purpose of retrenchment = Basic + DA (All DA)
DA refers to all DA
Calculation u/s 10(10B) is based on section 25F(b) of Industrial Disputes Act, 1947.

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Voluntary Retirement Scheme u/s 10 (10C) r/w Rule 2 BA
1. VRS must be an approved scheme and as per guidelines.
2. Exemption is available u/s 10(10C) only once during the lifetime of the employee.
3. The scheme should result in overall reduction in the total strength of employees.
4. Employee must have completed 10 years of service or 40 years of age (not applicable
to PSU).
5. Employer shall be a corporate, University approved by UGC/ any Act, CG, SG, local
authority, an authority established under any Act, co-operative society, IIT, etc
6. It is computed as under:
Actual Amount Received xxx
Less: Least of the following exempt u/s 10(10C)
(a) Actual amount received xxx
(b) Ceiling Limit
500,000
(c) 3 x Salary last drawn x Completed years of
service (Past) xxx
(d) Salary last drawn x Remaining months of xxx xxx
services. (Future)

TAXABLE AMOUNT xxx

1. Salary = Basic + DA if + Commission if

2. If details for calculation are not given ignore the same & consider to the extent
available.

Profits in lieu of salary

Section 17(3) - it includes
1. Any amount of compensation from employer in connection with termination of
employment or modification of terms of employment.
2. Any payment due to or received by the assessee from his employer or former employer
or from PF or any other fund.
Example: amount withdrawn from URPF, similarly, in case of withdrawal from RPF
within 5 years.
3. Any sum received under a Keyman Insurance Policy including the sum allocated by way
of Bonus on such policy.
4. Any amount received prior to employment or after cessation of employment.

Keyman Insurance Policy (KIP) [EET Method]

1. It is an Insurance policy taken by the employer on the key personnel in the organization.
2. The premium paid on KIP by employer is allowed as business expense.
3. If the amount is received by employee it is taxable as PILOS under the head salaries u/s
17(3).
4. If the amount is received by employer it is taxable as business income u/s 28.
5. If the amount is received by any other person it is taxable as income from other sources
u/s 56.

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DEDUCTIONS u/s 16
Exemption refers to income which does not form part of Total Income. Deduction is a
reduction from income

 Standard Deduction u/s 16(ia)

Standard deduction upto Rs.50,000 or amount of salary received, Whichever is Lesser
 Entertainment Allowance (EA) u/s 16(ii)
a. Fully Taxable and therefore forms part of gross salary. Subsequently deduction is
allowed u/s 16(ii).
b. Deduction u/s 16(ii) is available as below, only to Central and State Government
Employees [for other employees no deduction].
c. Least of the following is deductible u/s 16(ii) [Irrespective of the amount spent on
official purpose]
i. Actual Entertainment Allowance
ii. Ceiling Limit of Rs.5,000
iii. 1/5th or 20% of basic salary

Q 43. D, an employee of Govt. gets Rs.20,000 as Entertainment allowance for the year, out
of which he spends Rs.2,000 for official purposes, Rs.3200 for personal purposes and
saves the balance of Rs.14,800. One fifth of his basic salary amounts to Rs.8,000.
Compute Deductible EA.
[Hint Ans: 5,000]

 Professional Tax / Employment Tax u/s 16(iii)

a. It is deductible u/s 16(iii) to the extent of actual amount paid [allowed only on
payment basis irrespective of year to which it pertains to].
b. If it is paid by employer on behalf of employee it is first added to gross salary as
perquisite being obligation of employee met by employer and subsequently
allowed as deduction u/s 16(iii).

Summary on Government employee definition

*[Statutory Corporations includes RBI, SBI, LIC, UTI, ONGC, ESI Corporation]
Government Central State Local *Statutory
employee government government Authority corporations
RFA   x x
Gratuity    x
Commuted pension    
Leave salary   x X
Entertainment   x X
allowance
Summary on retirement benefits
Retirement benefit Section Ceiling limit
Gratuity 10(10) 20L
Commuted pension 10(10A) -
Leave salary 10(10AA) 3L
Retrenchment compensation 10(10B) 5L
VRS 10(10C) 5L

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TAXATION – FY 2022-23 – Intermediate
A. Standard Formula: [Basic + DA if + Commission if]
1. HRA
2. RPF
3. Gratuity – other employees
4. LS
5. VRS

B. Basic + All DA
1. POGA
2. RC u/s 10(10B)

C. Basic Only
1. EA u/s 16(ii)

D. Basic + DA if + ABC + All monetary payments and fees

excluding Perquisites, PF and Advance salary.
1. RFA

RELIEF FOR ARREARS, ADVANCE SALARY etc., u/s 89(1)

Applicability for claiming relief u/s 89(1)
The employee’s salary should be paid in arrears or in advance & he receives salary for more
than 12 months in one financial year; Due to the above reasons his income is assessed at a rate
higher than that at which it would otherwise have been assessed.
CLAIM OF RELIEF:
The relief should be claimed by the employee by the way of declaration in the prescribed
Form 10E. Such claim can be made to the employer at the time of making TDS. The employer
is bound to consider the claim of relief u/s 192(2A) [Sec 192 deals with TDS on salary].

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