1

INCOME UNDER THE HEAD SALARY

ASSESSMENT YEAR 2024-25 PART-1

“Confidence may not bring success but it gives the power to face any challenge” .

MEANING & APLICABILITY:-

Every payment made by an employer to his employee for service rendered would be
chargeable to tax as salaries. Before an income can become chargeable under the head
‘salaries’, it is vital that there should exist between the payer and the payee, the relationship
of an employer and an employee.
In other words No income will be included in the head Salaries if there is no relation of master & servant exist, In
others words any income will be included under the Salaried Income if it’s paid by employer to his employee as a
Master gives to his Servant. The essential characteristics of this kind of relation is that one (Payer) gives the
instruction & the other (Payee) will obey that order.

Deduction
(Section 16)
- Standard deduction
- Entertainment allowance$
- Professional tax$

Chargeability
(Section 15) Meaning
- Salary due (Section 17)
- Salary paid or allowed, though - Salary
not due Income - Perquisite
- Arrears of salary under the - Profits in lieu of salary
head
"Salaries"

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Example : 1]Sujata, an actress, is employed in Chopra Films, where she is paid a monthly remuneration of 2
lakh. She acts in various films produced by various producers. The remuneration for acting in such films is
directly paid to Chopra Films by the different producers.
In this case, ` 2 lakh will constitute salary in the hands of Sujata, since the relationship of employer and
employee exists between Chopra Films and Sujata.

[2]Salary paid to a partner by a firm will not fall under Salaries head but PGBP head.

Clarifications-
A]Full-time or part-time employment: Once the relationship of employer and employee exists, the income is to
be charged under the head “salaries”. It does not matter whether the employee is a full-time employee or a part-
time one.

B]Forgoing of salary: Once salary accrues, the subsequent waiver by the employee does not absolve him from
liability to income-tax. Such waiver is only an application and hence, chargeable to tax.

Example:
Mr. A, an employee instructs his employer that he is not interested in receiving the salary for April
2023 and the same might be donated to a charitable institution.
In this case, Mr. A cannot claim that he cannot be charged in respect of the salary for April 2023. It is only
due to his instruction that the donation was made to a charitable institution by his employer. It is only
an application of income.

Hence, the salary for the month of April 2023 will be taxable in the hands of Mr. A. He is, however,
entitled to claim a deduction under section 80G for the amount donated to the institution. Deduction
under section 80G is available only if Mr. A exercises the option of shifting out of the default tax
regime provided under section 115BAC(1A). [The concept of deductions is explained in detail in
Chapter 6].

C]Surrender of salary: However, if an employee surrenders his salary to the Central Government
under section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the
salary so surrendered would be exempt while computing his taxable income.

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D]Salary paid tax-free: This, in other words, means that the employer bears the burden of the tax
on the salary of the employee. In such a case, the income from salaries in the hands of the
employee will consist of his salary income and also the tax on this salary paid by the employer.

E]Place of accrual of salary: Under section 9(1)(ii), salary earned in India is deemed to accrue or
arise in India even if it is paid outside India or it is paid or payable after the contract of employment in
India comes to an end.
If an employee is paid pension abroad in respect of services rendered in India, the same will be
deemed to accrue in India. Similarly, leave salary paid abroad in respect of leave earned in India is
deemed to accrue or arise in India.

Section 9(1)(iii) provides that salaries payable by the Government to a citizen of India for services outside
India shall be deemed to accrue or arise in India. However, by virtue of section 10(7), any allowance or
perquisites paid or
allowed outside India by the Government to a citizen of India for rendering services outside
India will be fully exempt. Individual assessees who are not citizens of India are entitled to
the following exemptions in respect of remuneration/ salary received by them under section
10(6):
(i)Remuneration received by officials of Embassies etc. of Foreign States [Section 10(6)(ii)]
The remuneration received by a person for services as an official of an embassy, high
commission, legation, commission, consulate or the trade representation of a foreign State or
as a member of the staff of any of these officials is exempt.
Conditions:

(a)The remuneration received by our corresponding Government officials or members of the

staff resident in such foreign countries for similar purposes should be exempt.

(b)The above-mentioned members of the staff should be the subjects of the respective countries
represented and should not be engaged in any other business or profession or employment in
India.
(ii)Remuneration received for services rendered in India as an employee of foreign enterprise
[Section 10(6)(vi)]

Remuneration received by a foreign national as an employee of a foreign enterprise for service

rendered by him during his stay in India is also exempt from tax.
Conditions:

(a)The foreign enterprise is not engaged in any business or trade in India;

(b)The employee’s stay in India does not exceed 90 days during the previous year;
(c)The remuneration is not liable to be deducted from the employer’s income chargeable to
tax under the Act.

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(iii)Salary received by a non-citizen non-resident for services rendered in connection with employment on foreign
ship [Section 10(6)(viii)]
Salary income received by or due to a non-citizen of India who is also non-resident for services rendered in
connection with his employment on a foreign ship is exempt where his total stay in India does not exceed 90
days during the previous year.
(iv)Remuneration received by Foreign Government employees during their stay in India for specified training
[Section 10(6)(xi)]

Any remuneration received by employees of foreign Government from their respective Government during
their stay in India, is exempt from tax, if such remuneration is received in connection with their training in
any establishment or office of or in any undertaking owned by –

(a)the Government; or

(b)any company wholly owned by the Central or any State Government(s) or jointly by the Central and
one or more State Governments; or

(c)any company which is subsidiary of a company referred to in (b) above; or

(d)any statutory corporation; or

(e)any society registered under the Societies Registration Act, 1860 or any other similar law, which is wholly
financed by the Central Government or any State Government(s) or jointly by the Central and one or more
State Governments. Now, let us discuss the chargeability under section 15, the provisions explaining the
meaning of Salary, Perquisite and Profits in lieu of salary contained in section 17 and the deductions
under section 16.

Exemption under section 10(6) and 10(7) would be available to an assessee

irrespective of the regime under which he pays tax.

Individual/Hindu Undivided Family (HUF)/Association of Persons

(AOP)/Body of Individuals (BOI)/Artificial Juridical Person
Income-tax
Individuals/HUF/AoPs/BoIs and Artificial Juridical Persons can pay tax at concessional rates
under the default tax regime under section 115BAC. However, he/it has to forego certain
exemptions and deductions under this regime. Alternatively, they can exercise the option to shift
out of the default tax regime and pay tax under the optional tax regime as per the regular
provisions of the Act at the tax rates prescribed by the Annual Finance Act of that year.

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Default tax regime under section 115BAC of the Income-tax Act, 1961
I. Concessional tax rates

Individuals/ HUF/ AoPs/ BoIs or artificial judicial persons, other than those who
exercise the option to opt out this regime under section 115BAC(6), have to pay tax in
respect of their total income (other than income chargeable to tax at special rates under
Chapter XII such as section 111A, 112, 112A, 115BB, 115BBJ etc.) at the following
concessional rates, subject to certain conditions specified under section 115BAC(2) –

(i) Upto ` 3,00,000 NIL

(ii) From ` 3,00,001 to ` 6,00,000 5%
(iii) From ` 6,00,001 to ` 9,00,000 10%
(iv) From ` 9,00,001 to ` 12,00,000 15%
(v) From ` 12,00,001 to ` 15,00,000 20%
(vii) Above ` 15,00,000 30%

II. Conditions to be satisfied

The following are the conditions to be satisfied:

S. No. Particulars
(1) Certain deductions/exemptions not allowable: Section 115BAC(2) provides
that while computing total income, the following deductions/exemptions
would not be allowed:
Section Only Salary Exemption/Deduction
10(5) Leave travel concession
10(13A) House rent allowance
10(14) Exemption in respect of special allowances or benefit to
meet expenses relating to duties or personal expenses
(other than those as may be prescribed for this purpose)
10(17) Daily allowance or constituency allowance of MPs
and MLAs
10(32) Exemption in respect of income of minor child
included in the income of parent
16 (i) Entertainment allowance
(ii) Professional tax

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IDEAL FORMAT
1] Basic salary M
2] Advance salary M
3] Arrears of salary M
4] Taxable Portion of Gratuity, Pension, Encashment of earned leave M
5] Fees, Bonus, Commission, Profit in lieu of salary M
6] Taxable Portion of all allowance M
7] Taxable portion of NM
(i) Employer’s contribution to RPF in excess of 12% of salary
(ii) Interest credited in excess of specified 9.5%
8] Taxable value of Perquisite NM
9] Total Of 1 to 8= GROSS SALARY
10] Less-Deduction u/s 16
i) Standard Deduction-
ii) Entertainment allowance Deduction
iii) Professional tax Deduction
11] NET SALARY /TAXABLE SALARY

To Calculate Income under the head Salary- Four main components are as follows-

A]Basic Salary/Advance/Arrear of salary/Commission/Bonus etc.

[generally monthly except arrear of salary ][Monetary] 000
B]Allowances [generally monthly][Monetary] 000
C]Compensations & Profit in lieu of Salary [Generally receive after service and
one-time payment except Monthly pension and taxable if received during service] 000
D]Perquisites [generally monthly] [Non-Monetary] 000

A]BASIS OF CHARGE (SECTION 15)-Charging Section

1-Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis,
whichever is earlier.
2-However, 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.
3-If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed again when it
is paid.

Example : If A draws his salary in advance for the month of April 2024 in the month of March 2024
itself, the same becomes chargeable on receipt basis and is to be assessed as income of the P.Y.2023-24
i.e., A.Y.2024-25. However, the salary for the A.Y.2025-26 will not include that of April 2024.

Example : If the salary due for March 2024 is received by A later in the month of April 2024, it is still
chargeable as income of the P.Y.2023-24 i.e., A.Y.2024-25 on due basis. Obviously, salary for the
A.Y.2025-26 will not include that of March 2024.
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Advance Salary
Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not. It
may so happen that when advance salary is included and charged in a particular previous year, the rate of tax
at which the employee is assessed may be higher than the normal rate of tax to which he would have been
assessed. Section 89 provides for relief in these types of cases. The concept of relief under section 89 is explained
in this unit later on.

Difference between advance salary and advance against salary

Loan is different from salary. When an employee takes a loan from his employer, which is repayable in certain
specified installments, the loan amount cannot be brought to tax as salary of the employee.
Similarly, advance against salary is different from advance salary. It is an advance taken by the employee from his
employer.This advance is generally adjusted with his salary over a specified time period. It cannot be taxed as salary.

Arrears of salary
Normally speaking, salary arrears must be charged on due basis. However, there are circumstances
when it may not be possible to bring the same to charge on due basis if due to retrospective
effect.
Example:
If the Pay Commission is appointed by the Central Government and it recommends revision of salaries of
employees with retrospective date, the arrears received in that connection will be charged on receipt basis.
Here also, relief under section 89 is available.
Example:
If the Central Government announces increase in HRA in the previous year 2023-24 which is effective from
1.1.2022, then the arrears from 1.1.2022 to 31.3.3023 will be taxed in the previous year in which they are paid
because they were never due earlier. Here also, relief under section 89 is available.

SALARY, PERQUISITE AND PROFITS IN LIEU OF SALARY [SECTION 17]

Section 17

Perquisite Profits in lieu of salary

Salary [Section 17(1)] [Section 17(3)]
[Section 17(2)]

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Meaning of Salary

Section 17(1), defined the term “Salary”. It is an inclusive definition and includes monetary as well
as non-monetary items.

‘Salary’ under section 17(1), includes the following:

(i) wages,
(ii) any annuity or pension, any gratuity,
(iii) any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages,
(iv) any advance of salary,
any payment received in respect of any period of leave not availed by him i.e., leave salary
(v) or leave encashment,
(vi) Provident Fund:
- the portion of the annual accretion in any previous year to the balance at the credit of
(vii) an employee participating in a recognised provident fund to the extent it is taxable
and
- transferred balance in recognized provident fund to the extent it is taxable,

(viii) the contribution made by the Central Government or any other employer in the previous
year to the account of an employee under a pension scheme referred to in section
80CCD.
(ix) the contribution made by the Central Government in the previous year, to the
Agniveer Corpus Fund account of an individual enrolled in the Agnipath Scheme
referred to in section 80CCH.

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B]Allowances

Different types of allowances are given to employees by their employers. Generally

allowances are given to employees to meet some particular requirements like house rent,
expenses on uniform, conveyance etc. Under the Income-tax Act, 1961, allowance is
taxable on due or receipt basis, whichever is earlier. Various types of allowances normally
in vogue are discussed below-

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Allowances
Fully Taxable under both Fully Taxable under Fully Exempt only under
regimes default tax regime the optional tax regime
115BAC/ Partly
Exempt under the
optional tax regime
(i) Entertainment (i) House Rent (i) Allowances to High Court
Allowance Allowance [u/s Judges
(ii) Dearness Allowance 10(13A)] (ii) Salary and
(iii) Overtime Allowance (ii) Special Allowances Allowances paid by the
(iv) Fixed Medical [u/s 10(14)] United Nations
Allowance Except Organization
(v) City Compensatory (a) Travelling (iii) Sumptuary allowance
Allowance (to meet allowance granted to High Court or
increased cost of living in (b) Daily allowance Supreme Court Judges
cities) (c) Conveyance
(vi) Interim Allowance allowance Note – In cases (i) and (iii)
(vii) Servant Allowance (d) Transport above, the respective Acts
(viii) Project Allowance allowance to provide for such

(ix) Tiffin/Lunch/Dinner blind/ deaf and exemption, notwithstanding

dumb/ anything contained in the
Allowance
orthopedically Income- tax Act, 1961. In case
(x) Any other cash (ii), exemption is provided
handicapped
allowance under the respective Act,
employee
(xi) Warden Allowance
Note – The exceptions
notwithstanding anything to
(xii) Non-practicing the contrary contained in any
in (a) to (d) above are
Allowance other law.
partly exempt under
(xiii) Transport allowance to both the tax regimes.
employee other

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(A) Allowances which are fully taxable under both regime-

(1) City compensatory allowance: City Compensatory Allowance is normally intended to
compensate the employees for the higher cost of living in cities. It is taxable irrespective of the
fact whether it is given as compensation for performing his duties in a particular place or under
special circumstances.
(2) Entertainment allowance: This allowance is given to employees to meet the expenses
towards hospitality in receiving customers etc. The Act gives a deduction towards
entertainment allowance only to a Government employee. The details of deduction permissible
are discussed later on in this Unit. Not allowed under 115BAC(1A)[default tax regime].
(3) Transport allowance: Transport allowance granted to an employee to meet his expenditure for the purpose
of commuting between the place of his residence and the place of his duty is fully taxable. However,
in case of blind/ deaf and dumb/ orthopedically handicapped employees exemption upto ` 3,200 p.m. is
provided under section 10(14)(ii) read with Rule 2BB.This exemption under both regime.

(B) Fully Taxable under default tax regime 115BAC(1A)/ Partly Exempt under the
optional tax regime (old Tax regime)-

1]House Rent Allowance :U/S 10(13A):- HRA is a special allowance specifically granted to an employee by his
employer towards payment of rent for residence of the employee. Minimum of the following will be exempted
from tax:-
i) Actual amount received for relevant period.
ii) Rent paid – 10% of Salary for relevant period
iii)50% of salary if house is situated at Delhi,Mumbai,Kolkata,Chennai(metro cities) otherwise 40% of salary for relevant
period.
Note 1- Salary for this purpose means basic salary, dearness allowance, if provided in terms of employment and
commission as a fixed percentage of turnovers.
Salary means as per Gratuity C case. Salary will be considered on Due Basis.
Note 2- If employee does not pay any Rent actually or lives in own house then no exemption can avail.
Relevant period means the period during which the said accommodation was occupied by the assessee during the
previous year.
Note 3- If there is any change in the amount of salary, place of residence, rent paid & HRA received then
exemption will not be compute on annual basis. In such case exemption should be computed separately for each fraction of
the year in which above factors have change. Refer Test your knowledge first question.

2]Special Allowance :U/s 10(14):-

1] Traveling/ Transfer allowance
2]Daily allowance
3]Conveyance allowance
4]Helper allowance
5]Research (Academic) allowance
6]Uniform allowance

Above are exempt to the minimum of following-

i) Amount of allowance
ii) Amount utilized for the official purpose.

Note- An employee, being an assessee, who opts for the provisions of section 115BAC would be entitled
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for exemption only in respect of travelling allowance, daily allowance and conveyance allowance
mentioned in (1) to (3) above.

Allowances prescribed for the purposes of section 10(14)(ii)

S. Name of Allowance Extent to which allowance is exempt

No.
1. Any Special Compensatory Allowance in ` 800 or ` 300 per month depending upon the
the nature of Special Compensatory specified locations
(Hilly Areas) Allowance or High ` 7,000 per month in Siachen area of Jammu and
Altitude Allowance or Uncongenial Kashmir
Climate Allowance or Snow Bound
Area Allowance or Avalanche Allowance

2. Any Special Compensatory Allowance in ` 1,300 or ` 1,100 or

the nature of border area allowance ` 1,050 or ` 750 or ` 300 or
or remote locality allowance or ` 200 per month depending upon the specified
difficult area allowance or disturbed locations.
area allowance

3. Special Compensatory (Tribal ` 200 per month.

Areas/Schedule Areas/Agency
Areas) Allowance [Specified States]
4. Any allowance granted to an employee 70% of such allowance upto a maximum of `
working in any transport system to 10,000 per month.
meet his personal expenditure during
his duty performed in the course of
running such transport from one place
to another, provided that such
employee is not in receipt of daily
allowance

5. Children Education Allowance ` 100 per month per child upto a maximum
of two children.

6. Any allowance granted to an employee ` 300 per month per child upto a maximum
to meet the hostel expenditure on his of two children.
child
7. Compensatory Field Area ` 2,600 per month.
Allowance [Specified areas in Specified
States]
8. Compensatory Modified Field Area ` 1,000 per month.
Allowance [Specified areas in Specified
States]

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9. Any special allowance in the nature of ` 3,900 per month.

counter insurgency allowance granted
to the members of the armed forces
operating in areas away from their
permanent locations.
10. Any transport allowance granted to 3200Rs per month. `
an employee who is blind or deaf and
dumb or orthopedically handicapped 3
with disability of the lower ,
2
extremities of the body, to meet his
0
expenditure for commuting between
0
his residence and place of duty
p
12. Underground Allowance granted to an 800Rs Per month. `e
employee who is working in
uncongenial, unnatural climate in 8
underground mines. 0
0
13. Any special allowance in the nature of
high Altitude allowance granted to the
member of the armed forces operating
in high altitude areas

For altitude of 9,000 to 15,000 feet ` 1,060 per month

For above 15,000 feet ` 1,600 per month

14. Any special allowance in the nature of 4200Rs pm

Special compensatory highly active field
Area allowance granted to meet the
Member of the armed forces

15. Any special allowance in the nature of 3250Rs pm

Island duty allowance granted to meet the
Member of the armed forces in andaman
And nicobar and Lakshadweep group of
Islands.
1. Any assessee claiming exemption in respect of allowances mentioned at serial
numbers 7 & 8 and 9 shall not be entitled to exemption in respect of the
allowance and disturbed area allowance referred at serial number 2, respectively.
2. An employee, being an assessee, who opts for the provisions of section 115BAC
would be entitled for exemption only in respect of transport allowance granted
to an employee who is blind or deaf and dumb or orthopedically handicapped
with disability of the lower extremities of the body to the extent of ` 3,200 p.m.

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(C) Allowances which

are fully exempt under
optional tax regime[old
regime] & Both tax
regimes.

(A) Allowances which are fully exempt only under the optional tax regime
(i.e., the normal provisions of the Act)
(1)Allowance to Supreme Court/ High Court Judges: Any allowance paid to a Judge of a High Court and
Supreme Court under section 22A(2) of the High Court Judges (Conditions of Service) Act, 1954 and
section 23(1A) of the Supreme Court Judges (Salaries and Conditions of services) Act, 1958, respectively, is
not taxable under the optional tax regime (i.e., normal provisions of the Act).
(2)Allowance received from United Nations Organisation (UNO): Salary and Allowance paid by the UNO
to its employees is not taxable by virtue of section 2 of the United Nations (Privileges and Immunities) Act,
1947. Besides salary, any pension covered under the United Nations (Privileges and Immunities) Act and
received from UNO is also exempt from tax under the optional tax regime (i.e., normal provisions of the Act).
(3)Sumptuary allowance: of Service) Act, 1954 and Supreme Court Judges under section 23B of the
Sumptuary allowance given to High Court Judges under section 22C of the High Court Judges
(Conditions Supreme Court Judges (Conditions of Service) Act, 1958 is not chargeable to tax under the
optional tax regime (i.e., normal provisions of the Act)
Note – In cases (1) and (3) above, the respective Acts provide for such exemption, notwithstanding anything
contained in the Income-tax Act, 1961. In case (2), exemption is provided under the respective Act,
notwithstanding anything to the contrary contained in any other law.
(B)Allowances which are fully exempt under both regimes
Allowances payable outside India [Section 10(7)]: Allowances or perquisites paid or allowed as
such outside India by the Government to a citizen of India for services rendered outside India are
exempt from tax.

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(C)COMPENSATIONS-
1]Annuity or Pension

Meaning of Annuity

As per the definition, ‘annuity’ is treated as salary. Annuity is a sum payable in respect of a particular year. It is a
yearly grant. If a person invests some money entitling him to series of equal annual sums, such annual sums are
annuities in the hands of the investor.
Annuity received by a present employer is to be taxed as salary. It does not matter whether it is paid
in pursuance of a contractual obligation or voluntarily.
Annuity received from a past employer is taxable as profit in lieu of salary. Annuity received from person other than an
employer is taxable as “income from other sources”.

If received during service than taxable for all employees.

Types of Pension-

A) UNCOMMUTED PENSION – It is a periodical payment of pension. It is taxable for all employees.

B) COMMUTED PENSION Exempted U/S 10(10A):-- It is the payment of pension in Lump Sum amount.-

Example:
Suppose a person is entitled to receive a pension of say ` 10,000 p.m. for the rest of his life. He may
commute ¼th i.e., 25% of this amount and get a lumpsum of say ` 1,50,000. After commutation, his
pension will now be the balance 75% of ` 10,000 p.m. = ` 7,500 p.m.

a) In case of Central & State Govt. & Local Authority or Statutory Corporation/members of Civil Services/Defence
Services/Judges of SC & HC - it’s Fully Exempt.

b) In case of other employees-

i) If employee received Gratuity also---Exemption= 1/3*commuted value of Whole Pension
ii) If employee does not any Gratuity-- Exemption =1/2*commuted value of Whole Pension.

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Note:
1-Commuted value of whole pension = Pension received [commuted value]*100
% received as commuted part

2- Any commuted pension received by an individual out of annuity plan of the Life Insurance Corporation of India
(LIC) from a fund set up by that Corporation will be exempted.

 Exemption u/s 10(10A) in respect of commuted pension is available to an assessee

irrespective of the regime under which he pays tax.
 Judges of the Supreme Court and High Court will be entitled to the exemption of
the commuted portion u/s 10(10A)(i).

Exemption in respect of pension received by recipient of gallantry awards [Section 10(18)]

Any income by way of pension received by an individual is exempt from income- tax if –
(a) such individual was an employee of Central or State Government and
(b) has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or such other
gallantry award notified by the Central Government in this behalf.
In case of the death of such individual, any income by way of family pension received by any
member of the family of such individual shall also be exempt under this clause.
“Family”, in relation to an individual, means –

- The spouse and children of the individual; and

- The parents, brothers and sisters of the individuals or any of them, wholly or mainly
dependent on the individual.

Exemption under section 10(18) would be available to an assessee

irrespective of the regime under which he pays tax.

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2]Gratuity

Gratuity is a voluntary payment made by an employer in appreciation of services rendered by the employee. Now-
a-days gratuity has become a normal payment applicable to all employees. In fact, Payment of Gratuity Act, 1972
is a statutory recognition of the concept of gratuity. Almost all employers enter into an agreement with employees
to pay gratuity.

1)Gratuity:- Gratuity can be paid during the service or after the service but any gratuity paid during the service will be
taxable for all employees while any gratuity paid after service like in termination , retirement or death will be exempted up
to certain limit u/s 10(10).

Exempted Gratuity u/s 10(10):- Gratuity will be exempted only if relationship of Employer & Employee exist between payer
& payee otherwise it will not be exempted exm:- Gratuity paid by LIC to its insurance agent [not employee] will not be
exempted:-

CASE:A-In case of Central Govt./members of civil services/Local Authority employees whole amount of Gratuity will be
exempted u/s 10(10)(i).
Retirement gratuity received under the Pension Code or Regulations applicable to members of the Defence
Service is fully exempt from tax.

CASE:B- In case of employees who are covered by Payment of Gratuity Act 1972 minimum of following will be exempted:
1) Gratuity Received
2) Rs 2000000
3) 15/26*Monthly salary*Year of Service.
Note1. Period of service will be rounded to 1 year in excess of 6 months jobs fraction.
Note2. Monthly Salary means Basic Salary last drawn and includes All Dearness Allowance.

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CASE:C- In case of employees who are not covered by Payment of Gratuity Act 1972 [or if question is silent] minimum of
following will be exempted :
1) Gratuity Received
2) Rs2000000
3) 1/2 *Average Monthly Salary *Completed Year of service (Any Fraction will be ignored).

Note1) Salary Means Only Basic Salary and includes D.A. if as per employment’s term and % fixed commission on turnover.

Note2) A.M.S. means average of salary drawn by the employee for 10 months immediately preceding the month in which
he retire.

Note3) If an Individual getting gratuity from two employer at same time then separate calculation will be made but the limit
of Rs.2000000 will be jointly remain Rs.2000000.

Note4) If an Individual received gratuity in earlier years then the limit of Rs.2000000 will be reduced by the amount of
Gratuity exempted from tax in earlier years.

 Exemption under section 10(10) would be available to an assessee irrespective of the regime under
which he pays tax.

3]Fees, commission, perquisites or profits in lieu of or in addition to any salary or wages

The payment in the form of fees or commission by the employer to the employee are fully taxable. Commission may
be paid as fixed percentage of turnover or net profits etc.

Section 17(2) and 17(3) contains the provisions relating to perquisites and profits in lieu of salary, respectively. The
provisions of these sections would be discussed in detail separately in this unit.

Any Advance of Salary

The concept of “Advance Salary” is already discussed in this unit.

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4]Leave Salary or Leave Encashment-

Generally, employees are allowed to take leave during the period of service. Employee may avail such leave
or in case the leave is not availed, then the leave may either lapse or be accumulated for future or
allowed to be encashed every year or at the time termination/ retirement. The payment received on
account of encashment of unavailed leave would form part of salary. However, section 10(10AA) provides
exemption in respect of amount received by way of encashment of unutilised earned leave by an
employee at the time of his retirement, whether on superannuation or otherwise.

EXEMPTION OF LEAVE ENCASHMENT U/S 10(10AA):-

The amount received for the leave remaining, during or end of the service will be termed as Leave Encashment. But leave
encashment during the service will be fully taxable; exemption will be for lump sum payment of leave after job.
a) Fully Exempted in case of Government employees.

b) In case of other employee minimum of following will be exempted-

i) Amount received
ii) Rs. 2500000
iii) 10*Average monthly salary
iv) (Leave earn in days –leave availed in days)* Average monthly salary.
30
Note1) Leave earn will be maximum 30 days for a Completed Year of service. Salary as per Gratuity ‘C’ case.
Note 2) Average Monthly Salary means average of salary drawn by the employee for 10 months immediately preceding the
Date of retirement.
Note3) If an Individual getting LE from two employer at same time then separate calculation will be made but the limit of
Rs.300000 will be jointly remain Rs.2500000.
Note 4)If an employee received leave salary in earlier years then the limit of Rs.2500000 will be reduced by the amount
Exempted earlier years.
Note 5)LE received by the family members after the death of employee will be exempt in their hands.
Exm- Mr. A received Rs200000 for encashment of 600 days leave after serving 32 years of service he got 37 days leave every
year.AMS Rs20000 pm .Calculate leave encashment taxable
Exm- Mr. A received Rs100000 for encashment of leave after serving 32 years of service he got 25 days
leave every year, leave availed 500 days.AMS Rs15000 pm .Calculate leave encashment taxable.

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Exemption under section 10(10AA) would be available to an assessee irrespective of the

regime under which he pays tax.

5]PROVIDENT FUNDS-

Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time of his
retirement. Under this scheme, a specified sum is deducted from the salary of the employee as his contribution
towards the fund. The employer also generally contributes the same amount out of his pocket, to the fund. The
contributions of the employer and the employee are invested in approved securities. Interest earned thereon is
also credited to the account of the employee. Thus, the credit balance in a provident fund account of an employee
consists of the following:
(i) employee’s contribution
(ii) interest on employee’s contribution
(iii) employer’s contribution
(iv) interest on employer’s contribution.
The accumulated balance is paid to the employee at the time of his retirement or resignation. In the
case of death of the employee, the same is paid to his legal heirs.
The provident fund represents an important source of small savings available to the Government. Hence,
the Income-tax Act, 1961 gives certain deductions on savings in a provident fund account.

TYPES OF PRIVIDENT FUNDS-

Recognised Provident Fund (RPF): Recognised provident fund means a provident fund recognised by the
Commissioner of Income-tax for the purposes of income-tax. It is governed by Part A of Schedule IV to the
Income-tax Act, 1961. This schedule contains various rules regarding the following:
(a) Recognition of the fund
(b) Employee’s and employer’s contribution to the fund
(c) Treatment of accumulated balance etc.
A fund constituted under the Employees’ Provident Fund and Miscellaneous Provisions Act,
1952 will also be a Recognised Provident Fund.
INCOME TAX CA–INTER AY24-25
 21

(ii) Unrecognised Provident Fund (URPF): A fund not recognised by the Commissioner of
Income-tax is Unrecognised Provident Fund.

(iii) Statutory Provident Fund (SPF): The SPF is governed by Provident Funds Act, 1925. It applies
to employees of government, railways, semi- government institutions, local bodies, universities
and all recognised educational institutions.

(iv) Public Provident Fund (PPF): Public provident fund is operated under the Public Provident Fund
Act, 1968. A membership of the fund is open to every individual though it is ideally suited to
self-employed people. A salaried employee may also contribute to PPF in addition to the fund
operated by his employer. An individual may contribute to the fund on his own behalf as also on
behalf of a minor of whom he is the guardian.
For getting a deduction under section 80C, a member is required to contribute to the PPF a
minimum of ` 500 in a year. The maximum amount that may qualify for deduction on this
account is ` 1,50,000 as per PPF rules.

A member of PPF may deposit his contribution in as many installments in multiples of ` 500 as is
convenient to him. The amount of contribution may be paid at any of the offices or branch offices of the
State Bank of India or its subsidiaries and specified branches of banks or any Post Office.

Treatment Of PPF,RPF,SPF,URPF-
Particulars URPF RPF SPF PPF
1.Employee’s Deduction u/s 80C not Deduction u/s 80C Deduction u/s 80C Deduction u/s
Contribution available. available.If opt out from available.If opt out 80C available.If
115BAC(1A). from 115BAC(1A). opt out from
115BAC(1A).
2.Employers’s No Treatment Upto 12% of Salary is Fully Exempt NA
Contribution exempt & excess will be
taxable U/S 17(1).
3.Intt. on PF-
a]Employer’s No Treatment a]& b] Exempt up to 9.5% a]Fully Exempt a]NA
Contribution P.A. & any excess is
b]Employee’s No Treatment taxable SALARY U/S b]Exempt upto
Contribution 17(1). certain limit. b]Fully exempt

4.Repayment of i)Employee’s Contribution- Exempt U/S 10(12) Exempt Exempt

lump sum amount Intt. on such repayment is subject to certain u/s 10(11) u/s 10(11
on retirement etc. taxable under IFOS. conditions.
ii)Employer’s Contribution-
Contribution and intt.
accrued on such
contribution will be taxable
in the year of repayment
under salary u/s 17(3).

Note-Salary means as per Gratuity C case

INCOME TAX CA–INTER AY24-25
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Note - Interest credited on contribution by such person/employee

As per section 10(11), any payment from a Provident Fund (PF) to which Provident Fund Act, 1925,
applies or from Public Provident Fund would be exempt.

Accumulated balance due and becoming payable to an employee participating in a Recognized

Provident Fund (RPF) would be exempt under section 10(12).

However, the exemption under section 10(11) or 10(12) would not be available in respect of income
by way of interest accrued during the previous year to the extent it relates to the amount or the
aggregate of amounts of contribution made by that person/employee exceeding ` 2,50,000 in any
previous year in that fund, on or after 1st April, 2021.

If the contribution by such person/employee is in a fund in which there is no employer’s

contribution, then, a higher limit of ` 5,00,000 would be applicable for such contribution, and interest
accrued in any previous year in that fund, on or after 1st April, 2021 would be exempt upto that limit.

It may be noted that interest accrued on contribution to such funds upto 31st March, 2021 would
be exempt without any limit, even if the accrual of income is after that date.

The CBDT has, vide Rule 9D, notified the manner to calculate taxable interest relating to
contribution in a provident fund or recognized provident fund, exceeding threshold limit.
Interest income accrued during the previous year which is not exempt from inclusion in the total income
of a person (taxable interest) shall be computed as the interest accrued during the previous year in the
taxable contribution account.

For this purpose, separate accounts within the provident fund account shall be maintained during the
previous year 2021-22 and all subsequent previous years for taxable contribution and non-taxable
contribution made by a person.

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Exemption of Accumulated balance of RPF ,payable to an employee

Has the employee rendered continuous service of at least

5 years with the employer?

YES NO

Are his services terminated due to (i) his ill-health (ii)

Exempt contraction or discontinuance of employer’s business or
(iii) any other cause beyond the control of the
employee?

Yes No

Exempt

Is the entire balance Is the entire balance

standing to the N N standing to the credit
credit of the o Taxable o of the employee
employee * transferred to his NPS
transferred to his account referred to in
individual account in section 80CCD and
any RPF maintained notified by the Central
with his new Government?
employer?
Yes
Ye
s Exempt
Exempt

Where the accumulated balance in Recognised Provident Fund becomes taxable, the tax payable in
each of the years would be computed as if the fund had been an Unrecognised Provident Fund and
the difference in tax would be payable by the employee.

Note:
If, after termination of his employment with one employer, the employee obtains employment under another
employer, then, only so much of the accumulated balance in his provident fund account will be exempt which is
transferred to his individual account in a recognised provident fund maintained by the new employer. In such a case,
for exemption of payment of accumulated balance by the new employer, the period of service with the former
employer shall also be taken into account for computing the period of five years’ continuous service.

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The contribution made by the Central Government or any other employer in the
previous year to the account of an employee under a pension scheme referred to in
section 80CCD
National Pension scheme is a scheme approved by the Government for Indian citizen aged between 18-70
years. Subscriber of the NPS account contributes some amount in their account. In case of any employee, being a
subscriber of the NPS account, employer may also contribute into the employee’s account.
Employer’s contribution to NPS account would form part of salary of employees under section 17(1).
However, while computing total income of the employee-assessee, a deduction under section 80CCD is
allowed to the assessee in respect of the employer’s as well as employee’s contribution under a pension
scheme referred therein. (Deduction under section 80CCD will be discussed in detail in Chapter 6 –
“Deductions from Gross Total Income”)

Deduction under section 80CCD(2) in respect of employer’s contribution would be available to an assessee
irrespective of the regime under which he pays tax. However, deduction under section
80CCD(1)/(1B) in respect of employee’s contribution would be available to an assessee only if he exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A).

INCOME TAX CA–INTER AY24-25