Tax Planning

BASIC ELEMENTS OF SALARY

• Payer and payee must have employer and employee (or Master & Servant)
relationship; and
• Payment must have been made by the employer in such capacity.

• Example 1: A teacher receives emoluments in kind from school in which he teaches.

Will it be treated as salary?
• Yes, it is immaterial whether salary has been received in cash or in kind.
• Example 2: A teacher of a college receives fees from a University for checking answer
sheets. Will it be treated as salary?
• No, as employer – employee relationship does not exist between payer and payee.
(College-teacher is not the employee of the University). Such receipt shall be taxable
under the head ‘Income from other sources’.
DEFINITION OF SALARY [SEC. 17(1)]
• As per sec. 17(1) of the Income-tax Act, 1961, salary includes the following:
• a) Wages;
• b) Any annuity or pension;
• c) Any gratuity;
• d) Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages;
• e) Any advance of salary;
• f) Any payment received in respect of any period of leave not availed of by the assessee;
• g) The portion of the annual accretion in any previous year to the balance at the credit of an
employee, participating in recognized provident fund, to the extent it is taxable;
• h) Transferred balance in a Recognized Provident Fund to the extent it is taxable.
• i) Contribution made by the employer in the previous year, to the account of an employee
under a pension scheme referred to in sec. 80CCD [National Pension Scheme and Atal
Pension Yojana].
Illustration
• Mr. X joined A Ltd. for a salary of Rs. 5,000 p.m. on 1/4/2019. In the
year 2020-21, his increment decision was pending. On 1/4/2021, his
increment was finalized as for 2020-21: Rs. 1,000 p.m. and for 2021-
22 Rs. 1,500 p.m. Such arrear salary received on 5/4/2021. Find Gross
taxable salary. Further, salary of April 2022 has also been received in
advance on 15/03/2022.
Solution
Allowances and Perquisites
• Allowance refers to the financial benefit which an
employer provides to employees in addition to the basic
salary they draw, so as to meet the expenses that
employees may incur to perform the job or because of
it.
• Conversely, perquisites refer to a financial benefit
which an employer provides to an employee because of
their job or the designation they hold. These are like
add ons to an employee’s compensation. It facilitates
the management of a number of expenses for which the
employee does not need to spend money from his own
pocket.
Fully Taxable Allowances
• Dearness Allowance: Dearness Allowance or DA is the allowance
given to the salaried people as a cost of living adjustment
allowance, so as to survive inflation.
• Entertainment Allowance: Entertainment allowance is given for
reimbursing the expenses made on the customer’s hospitality. The
lowest of the three amounts that follow is an allowable deduction
for government employees – 1/5th of basic salary, the actual
amount received, or ₹ 5000.
• Overtime Allowance: When employees work over and above their
working hours, overtime allowance is provided to the employees.
• City Compensatory Allowance: In the urban cities where the
cost of living is extremely high, city compensatory allowance is
given to the employees to survive the inflated cost of living.
• Meal/ Tiffin Allowance: Allowance provided for tiffin
or meal is meal allowance.
• Cash Allowance: Cash Allowance is provided by the
employer such as marriage allowance, bereavement
allowance or holiday allowance, etc.
• Servant Allowance: Servant allowance is given by the
employer to an employee to get the services of a
servant.
• Medical Allowance: Allowance that an employer pays
to an employee at a fixed rate, regardless of the
treatment taken by the employee.
• Non-practicing Allowance: Allowance given to professionals to
compensate them for restriction on private practice.
• Warden or Proctor Allowance: Allowances given to employees of
educational institutions for working as warden of the hostel or
working as proctor in the institutions.
• Deputation Allowance : Allowances given to an employee, when he is
sent on deputation for a temporary period from his permanent place
of service.
Allowances, deduction which
depends on actual expenditure [Sec.
10(14)(i)]
Tax Treatment of aforesaid
allowances
• Minimum of the following shall be exempted:
• a) Actual amount received;
or
• b) Actual expenditure incurred for such purpose.
Partially Taxable Allowances
House Rent Allowance

Children Education Allowance

Children Hostel Allowance

Truck Driver’s Allowance

Transport Allowance
House Rent Allowance [Sec. 10(13A)
and rule 2A
• An allowance to meet the expenses in connection with the rent of the house,
by whatever name called.
• Tax Treatment: Minimum of the following is exempted from tax:
• a. Actual HRA received.
• b. An amount equal to 50% of salary (when house is situated in a metro city)
or 40% of salary (when house is situated in any other place) for the relevant
period.
• c. The excess of rent paid over 10% of salary. [Arithmetically, (Rent Paid –
10% of Salary)]
• Note: Salary here means: Basic + D.A. (if it forms a part of retirement
benefit) + Commission as a fixed % on turnover.
• Notes:
• a) Salary shall be determined on due basis for the period for which
the employee occupies rented accommodation in the previous year
and gets HRA.
• b) Exemption is not available if employee lives in his own house, or in
a house for which he does not pay any rent.
• c) For criteria of 50% or 40% of salary as deduction, place of
employment is not significant but place where the house is situated is
important.
• d) Deduction from HRA depends on Salary of the employee, Amount
of HRA, place of residence (not place of employment), rent paid by
the employee.
Numerical
• X, a resident of Ajmer, receives Rs. 48,000 as basic salary during the
previous year 2021-22. In addition, he gets Rs. 4,800 as dearness
allowance forming part of basic salary, 7% commission on sales made
by him (sale made by X during the relevant previous year is Rs.
86,000) and Rs. 6,000 as house rent allowance. He, however, pays Rs.
5,800 as house rent. Determine the quantum of exempted house rent
allowance.
Solution
Numerical
• Compute the taxable house rent allowance of Mr. Abhijeet from the
following data:
• Basic Salary Rs. 5,000 p.m., D.A. Rs. 2,000 p.m., HRA Rs. 4,000 p.m.,
Rent paid Rs. 4,000 p.m. in Pune.
• On 1/07/2021, there is an increment in Basic salary by Rs. 1,000.
• On 1/10/2021, employee hired a new flat in Kolkata at the same rent
as he was posted to Kolkata.
• On 1/01/2022, employee purchased his own flat and resides there.
Solution
Children Education Allowance
• An allowance to meet the expenses in connection with education of
children, by whatever name called.
• Treatment:
• Minimum of the following is exempted from tax
• a) Rs.100 per month per child (to the maximum of two children)
• b) Actual amount received for each child (to the maximum of two
children)
Children Hostel Allowance
• An allowance to meet the hostel expenses of children, by whatever name called.
• Treatment:
• Minimum of the following is exempted from tax –
• a) Rs.300 per month per child (to the maximum of two children)
• b) Actual amount received for each child (to the maximum of two children)
• Notes for Children Education Allowance and Hostel Allowance:
• a) Child includes adopted child, step-child but does not include illegitimate child
and grandchild.
• b) Child may be major or minor child.
• c) Deduction is available irrespective of actual expenditure incurred on education
of child
Numerical
• Mr. Laloo Singh, received education allowance of Rs.80 p.m. for his
1st child, Rs.90 p.m. for his 2nd child and Rs.120 p.m. for his 3rd child.
He also received hostel allowance of Rs.1,000 p.m. None of his
children are studying. Find taxable Children Education Allowance and
Hostel allowance.
Solution
Numerical
• Mr. & Mrs. X have three children and two of them are not studying.
Both Mr. & Mrs. X are working in A Ltd. and getting children education
allowance Rs.500 per month and hostel allowance Rs.1,000 per
month. Compute taxable children education allowance and hostel
allowance.
Solution
Truck Driver’s Allowance
• Any allowance (by whatever name called) granted to an employee
working in any transport system to meet his personal expenditure
during his duty performed in the course of running of such transport
(from one place to another place), provided such employee is not in
receipt of daily allowance.
• Treatment: Minimum of the following shall be exempted:
• a) 70% of allowance.
• b) Rs.10,000 p.m.
• Taxpoint: If assessee is in receipt of Daily allowance then above
allowance shall be fully taxable.
Transport Allowance
• An allowance, by whatever name called, to meet the expenditure for
the purpose of travelling between the place of residence and the place
of duty.
• Available to: Assessee is blind / deaf and dumb / orthopaedically
handicapped.
• Treatment: Minimum of the following shall be exempted:
• a. Actual amount received; or
• b. Rs. 3,200 p.m.
• Taxpoint: No exemption is available to the assessee other than
specified above.
Fully Exempt Allowances
• Allowance paid to government servants in foreign countries:
Government employees paid an allowance while serving in foreign
countries.
• Sumptuary Allowance: This allowance is given to the judges of the
Supreme Court and High Court (expenses incurred on entertaining
visitors).
• Allowance received from UNO (United Nations Organization): Basic salary or
Allowance paid by the UNO to its employees are not taxable.
• Allowance to judges of the High Court or the Supreme Court: Any allowance paid to
Judges of the High Court u/s 22A(2) and sumptuary allowance u/s 22C of the “High
Court Judges (Conditions of Service) Act, 1954” is not taxable. Allowance to the
Supreme Court Judges u/s 23B of the “Supreme Court Judges (Conditions of Service)
Act, 1958” is also exempt
• Salary to teacher or professor from SAARC Member States [DTAA]:
Salary including allowances and perquisites of a teacher or professor or research scholars
from SAARC Member States shall not be taxable if following conditions are satisfied:
1. Such professor, teacher or research scholar is a resident of other SAARC member State
(i.e., Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan & Sri Lanka) prior to visiting
another member State.
Taxpoint: An individual is deemed to be a resident of a member State if he/she is resident in
that member State in the fiscal year in which he visits the other member State or in the
immediately preceding fiscal year.
2. Such visit is for the purposes of teaching or engaging in research or both at a university or
college or similar approved institution in that other Member State.
3. The remuneration from aforesaid activities in other Member State is exempt for a period
of 2 years from the date of arrival in the other member State
Numerical
Solution
Numerical
Solution
PERQUISITE [SEC. 17(2)]
• As per sec. 17(2) of the Income tax Act, Perquisite includes –
• i. Value of rent-free accommodation provided by the employer.
• ii. Value of concession in rent in respect of accommodation provided to the assessee by his employer.
• iii. The value of any benefit or amenity granted or provided free of cost or at concessional rate to
‘specified employees’.
• iv. Amount paid by an employer in respect of any obligation which otherwise would have been
payable by the employee.
Taxpoint: Any obligation of the employee met by employer shall be taxable on cash basis i.e. in the year
in which amount is paid by the employer.
Example: Employer paid employees’ professional tax liability pertaining to period 2020-21 in April 2021,
such perquisite shall be taxable in the previous year 2021-22.
• v. Sum payable by an employer, whether directly or through a fund other than recognised provident
fund or approved superannuation fund or deposit-linked insurance fund, to effect an assurance on the
life of the assessee or to effect a contract for an annuity.
Taxpoint: Such sum shall be taxable on accrual basis
• vi. The value of any specified security or sweat equity shares allotted or transferred, directly
or indirectly, by the employer, or former employer, free of cost or at concessional rate to the
assessee.
• vii. The amount or the aggregate of amounts of any contribution made to the account of the
assessee by the employer:
(a) in a Recognised Provident Fund (RPF);
(b) in the scheme referred to in sec. 80CCD(1) [i.e., NPS]; and
(c) in an approved superannuation fund, - to the extent it exceeds ` 7,50,000 in a previous year.
Taxpoint: There is combined upper limit of ` 7,50,000 in respect of employer’s contribution in a
year to NPS, superannuation fund and recognised provident fund and any excess contribution
is taxable.
• viii. The annual accretion (like interest, dividend, etc.) during the previous year to the
balance at the credit of the aforesaid fund or scheme to the extent it relates to the
contribution referred above.
Taxpoint: Such accretion shall be included in the total income and shall be computed in such
manner as may be prescribed.
• ix. the value of any other fringe benefit or amenity as may be prescribed.
Specified employees [Sec. 17(2)(iii)]
• Specified employee means:
• 1. A director employee.
• Note: It is immaterial –
• a) whether he is a nominee of the workers, financial institutions, etc. on the board;
• b) whether the employee is full time director or a part time; and
• c) whether he was a director throughout the previous year or not.
• Taxpoint:
 A director-employee shall be treated as specified employee of that company only.
• Example: If Manu is working with X Ltd. as director-employee and with Y Ltd. as
employee only, she will be treated as specified employee only for X Ltd. and not for Y Ltd
 Director even for a day is construed as specified employee of such company.
• 2. An employee who has substantial interest in the employer
company. Substantial interest means the employee who beneficially
holds 20% or more voting power in the employer company.
• Taxpoint:
Such employee shall be treated as specified employee of that
company only.
The main criteria is beneficial ownership and not the legal ownership.
Substantial interest must be held by the assessee individually, and not
together with relative.
Example: Mr. Mohan holds 18% equity share of X Ltd. and his wife holds
7% equity share of the same company. In such case Mr. Mohan will not
be treated as specified employee.
• 3. An employee whose aggregate salary from all employers together exceeds Rs. 50,000 p.a.
For computing the sum of Rs.50,000, following are to be excluded/deducted:
• a) All non-monetary benefits;
• b) Non-taxable monetary benefits;
• c) *Deduction u/s 16(ia), 16(ii) and 16(iii) [Discussed later in this chapter]; and
• d) Employer’s contribution to Provident Fund.
• Taxpoint:
 Where salary is received from two or more employers, the aggregate salary from all
employers shall be considered for calculation of above ceiling. And if aggregate salary
exceeds Rs.50,000 p.a. the employee shall be treated as specified employee of all employers.
Example: Mr. Rohan is working with X & Co. and Y Ltd. His taxable monetary salary from X &
Co. is ` 36,000 p.a. and from Y Ltd. is Rs. 45,000 p.a. Since the aggregate salary is more than `
50,000 p.a. Mr. Rohan will be treated as specified employee for both the employer i.e. X & Co.
and Y Ltd.
 Even ‘DA not forming a part of salary for retirement benefit’ shall be included in salary, while
determining the above limit of ` 50,000 p.a.
Exempted Perquisites
• Following perquisites are exempted in hands of employee:
• 1. Tea or snacks: Tea, similar non-alcoholic beverages and snacks provided during
working hours.
• 2. Food: Food provided by employer in working place.
• 3. Recreational facilities: Recreational facilities extended to a group of employees.
• 4. Goods sold to employee at concessional rate: Goods manufactured by
employer and sold by him to his employees at concessional (not free) rates.
• 5. Conveyance facility: Conveyance facility provided –
• to employees for journey between office and residence and vice versa.
• to the judges of High Court and Supreme Court
• 6. Training: Amount spent on training of employees including boarding & lodging expenses for
such training.
• 7. Services rendered outside India: Any perquisite allowed outside India by the Government to
a citizen of India for rendering services outside India.
• 8. Contribution in some specified schemes
• • Employer’s contribution to a pension or deferred annuity scheme.
• • Employer’s contribution to staff group insurance scheme.
• • Annual premium paid by the employer on personal accident policy affected by him in respect
of his employee.
• 9. *Loans
Loan given at nil or at concessional rate of interest by the employer provided the aggregate
amount of loan does not exceed ` 20,000.
Interest free loan for medical treatment of the diseases specified in Rule 3A
• 10. *Medical facility: A provision of medical facility at office is exempt.
• Note: However, medical allowance is fully taxable.
• 11. Periodicals and journals: Periodicals and journals required for discharge of work.
• 12. Telephone, mobile phones: Expenses for telephone, mobile phones actually incurred
on behalf of employee by the employer whether by way of direct payment or
reimbursement.
• 13. *Free education facility: Free education facility to the children of employee in an
institution owned or maintained by the employer provided cost of such facility does not
exceed Rs. 1,000 p.m. per child.
Note: Such facility is not restricted to two children as in case of Children Education
allowance.
• 14. Computer or Laptop: Computer or Laptop provided whether to use at office or at
home (provided ownership is not transferred to the employee).
• 15. *Movable assets: Sale or gift of any movable asset (other than car and electronic
items) to employee after being used by the employer for 10 or more years.
• 16. *Leave Travel Concession: Leave Travel Concession (LTC) subject to few conditions.
• 17. Rent-free accommodation
Rent-free official residence provided to a Judge of a High Court or the Supreme Court.
Rent-free furnished residence (including maintenance thereof) to Official of Parliament, a
Union Minister or a Leader of opposition in Parliament.
• 18. *Accommodation: Accommodation provided –
on transfer of an employee in a hotel for a period not exceeding 15 days in aggregate.
in a remote area to an employee working at a mining site or an onshore exploration site or a
project execution site or a dam site or a power generation site or an offshore site.
19. Tax on non-monetary perquisite paid by employer on behalf of employee. With effect from
A.Y. 2003-04 a new sec. 10(10CC) has been inserted which provides that income tax paid by
employer on behalf of employee on income, being non-monetary perquisite, is not a taxable
perquisite.
20. Health club, Sports club facility
VALUATION OF PERQUISITES
(VALUATION OF ACCOMODATION)
I) Central and State Government
Employee (including military
person)
• Where the accommodation is provided by the Central Government or
any State Government to the employees either holding office or post
in connection with the affairs of the Union or of such State, the value
of perquisite in respect of such accommodation is equal to the licence
fee, which would have been determined by the Central or State
Government in accordance with the rules framed by the Government.
• {Academically, the taxable value of the perquisite will be mentioned in
the problem}
• Taxpoint: Employees of a local authority or a foreign government are
not covered under this category.
II) Accommodation provided by
Government to an employee serving
on deputation
• Where the accommodation is provided by the Central Government or
any State Government to an employee who is serving on deputation
with any body or undertaking under the control of such Government,
then the value of perquisite of such an accommodation shall be:
• Note:
a) Salary for the purpose of Rent free accommodation: Salary here means: Basic + Dearness
allowance/pay (if it forms a part of retirement benefit) + Bonus + Commission + Fees + All other taxable
allowances (only taxable amount) + Any other monetary payment by whatever name called (excluding
perquisites and lump-sum payments received at the time of termination of service or superannuation or
voluntary retirement, like gratuity, severance pay leave encashment, voluntary retrenchment benefits,
commutation of pension and similar payments)
• Taxpoint
 Salary shall be determined on due basis.
 Where an assessee is receiving salary from two or more employers, the aggregate salary for the period
during which accommodation has been provided (by any of the employer) shall be considered.
 Monetary payments, which are not in the nature of perquisite, shall be considered. E.g. Leave
encashment received during the continuation of service shall be included in salary for this purpose.
However, if such pay leave is received at the time of retirement, then such receipt shall not be
considered.
 Here salary does not include employer’s contribution to Provident Fund of the employee.

b) The employer of such an employee shall be deemed to be that body or undertaking where the
employee is serving on deputation.
III) Other Employees (residual
category)
• Notes:
a) Salary for the purpose of Rent free accommodation: Salary here means: Basic + Dearness
allowance/pay (if it forms a part of retirement benefit) + Bonus + Commission + Fees + All
other taxable allowances (only taxable amount) + Any other monetary payment by
whatever name called (excluding perquisites and lump-sum payments received at the time
of termination of service or superannuation or voluntary retirement, like gratuity, severance
pay leave encashment, voluntary retrenchment benefits, commutation of pension and
similar payments)
b) Taxpoint
 Salary shall be determined on due basis.
 Where an assessee is receiving salary from two or more employers, the aggregate salary for the
period during which accommodation has been provided (by any of the employer) shall be
considered.
 Monetary payments, which are not in the nature of perquisite, shall be considered. E.g. Leave
encashment received during the continuation of service shall be included in salary for this
purpose. However, if such pay leave is received at the time of retirement, then such receipt shall
not be considered.
 Here salary does not include employer’s contribution to Provident Fund of the employee.
• b) Exemption of 90 days in case of allotment of two houses: Where an
employee is transferred from one place to another and he is provided with
an accommodation at new place also, the value of perquisite shall be taken
for only one such house having lower value for a period not exceeding 90
days. Thereafter, the values of both such houses are taxable.
• c) Any accommodation provided to an employee working at a mining site;
or an on-shore oil exploration site; or a project execution site; or a dam
site; or a power generation site; or an off-shore site, which a. being of a
temporary nature and having plinth area not exceeding 800 sq.ft. is located
not less than 8 kms away from the local limits of any municipality or a
cantonment board; or b. is located in a remote area.
• d) Remote area here means an area located at least 40 K.M. away from a
town having population not exceeding 20,000 as per latest published
census.
Numerical
 Solution

Note: Professional tax paid on behalf of employee is a perquisite; hence the same shall not be included in salary
for the aforesaid purpose
Numerical
Solution
Working Notes
Numerical
Solution
Working Notes
Valuation of accommodation
provided at concessional rent

Taxpoint: The above rule of valuation shall be applicable in case of the Government employee also.
Valuation of Rent-free furnished
accommodation
Numerical
• Sri Ashutosh has been provided with a furnished accommodation in a
city having population of 14,00,000 as per last census. Municipal
Value of the house (owned by employer) is Rs. 80,000 whereas Fair
rent of the house is Rs 1,00,000. His salary details are as under:
Basic 25,000 p.m.
Dearness Allowance 5,000 p.m.
Children Education allowance 3,000 p.m.
[He has one son and two married
daughters]
Solution
Working Notes
VALUATION OF PERQUISITES IN
RESPECT OF MOTOR CAR [RULE
3(2)]
GIFT, VOUCHER OR TOKEN GIVEN BY
EMPLOYER [RULE 3(7)(iv)]
• The value of any gift, voucher, or token (in lieu of which any gift may
be received) given to the employee (or any member of his household)
on ceremonial occasion or otherwise by the employer shall be taxable
in the hands of all employees. However, gift, voucher or token upto
Rs. 5,000, in aggregate, during the previous year, shall be exempted.
Notes:
• a) Where worth of gift is in excess of Rs. 5,000 then amount in excess
of Rs.5,000 shall be taxable.
• b) No such exemption (Rs. 5,000) is available on gift made in cash or
convertible into money.
LEAVE TRAVEL CONCESSION
[SEC.10(5)]
• If an employee goes on travel (on leave) with his family and traveling cost is
reimbursed by the employer, then such reimbursement is fully exempted.
• Notes: 1) Journey may be performed during service or after retirement.
• 2) Employer may be present or former.
• 3) Journey must be performed to any place within India.
• 4) In case, journey was performed to various places together, then
exemption is limited to the extent of cost of journey from the place of
origin to the farthest point reached, by the shortest route.
• 5) Employee may or may not be a citizen of India.
• 6) Stay cost is not exempt.
• Journey performed Maximum exempted fare
1.By Air Air economic class fare of shortest route
2. By Rail Airconditioned 1st class fare of shortest route