How to Calculate Income tax on Salary

Ultimate guide on how to calculate Income Tax on Salary with Example

This post is the most detailed guide on understanding Income Tax on Salary in India.

At the end, you will be able to learn how to calculate income tax on salary and how to save tax on Salary Income in India

Who will benefit from this guide? This guide will be extremely helpful if you are :

  • salaried person in India,
  • Professional (Chartered Accountant/Tax Consultant/Accountant)
  • Student of Accounts and Taxation

.You can find below the list of contents, if you want to skim through this guide.

How to read this article?

This is a very long post on understanding income tax on salary. Probably, the most exhaustive guide. It may not possible to read and understand in one go. Here's what you can do to make the best out of this guide.

- If you are in hurry and just need quick tax planning and tax saving tips, please go through the 'How to save tax on Salary Income' section of this guide at the end. But do read the full guide when you have time because devil is in the detail.

- If you want to understand, any allowances you are getting from your employer is taxable or exempt, go through 'Allowances (Taxable and Exempt)' section.

- If you are getting free benefits from your employer, you might want to check their taxability as well. Go through, 'Valuation of Perquisites' section. This is very long section, so you can also skim through table of contents to go to the specific perquisite you are getting.

- To understand about TDS on Salary, go through the 'TDS on Salary' section. You will get a quick idea of how Tax Deducted at Source from Salary is calculated.

- I have added boxes at various places in between the article. These boxes contains important points related to the discussed topic. It is useful for professional and students so that they don't miss out on something important.


Contents

What is Salary and what does it include?

Salary is a compensation given by business/organisation to any person on employment for availing his/her service. It is typically paid on monthly basis at the end of the month.

Section 17(1) of the Income Tax Act, 1961 defines the term salary and it includes the following:

- Wages

- Annuity or pension

- Gratuity

- Fees, commissions, perquisites or profit in lieu of salary or in addition to salary

- Advance of Salary.

- Leave Encashment - Any payment received by an employee in respect of any period of leave not availed of by him.

- Annual accumulation to the balance of Recognized Provident Fund

- Transferred balance in a Recognised provident fund to the extent it is taxable, and

- Contribution by Central Government or any other employer to the account of employee under National Pension Scheme (NPS) referred to in section 80CCD.

Components of Salary

Salary can be divided into different components based on characteristics:

S.N Components Particulars Taxability
1 Fixed Salary Basic Pay, DA, all types of allowances etc. Fully and Partially Taxable
2 Variable Salary Performance and profit based incentive Fully Taxable
3 Reimbursements Reimbursement of Medical, travel, telephone expenses etc Fully and Partially Taxable
4 Statutory Contributions Provident Fund, ESI, NPS Fully and Partially Taxable

IMPORTANT POINTS

  •  Salary Income is chargeable to tax on ''due basis'' or 'receipt basis'' whichever is earlier.
  • Existence of employer-employee relationship is must for a income to be chargeable as Salary.
  • Remuneration, bonus or commission received by partner from partnership firm is taxable as ''Business or Professional Income''.
  • Remuneration  received by foreign nationals as diplomatic personnel, consular personnel, trade commissioner, staff of foreign mission if exempt from tax.

Allowances (Exempt and Taxable)

Allowances are fixed amount of money given to a employee in addition to the salary. They are given to cover expenses incurred by employee during the course of service (like conveyance allowance) or as a compensation for unusual conditions in employment (like underground allowance).

Some allowance are fully taxable, some are partially taxable and some are fully exempt from income tax.

As a salaried person you may be receiving various allowance as a part of your CTC. So, it is very important that full tax benefit of these allowance must be claimed. The following is the detailed list of allowances along with their taxability. Also, as a professional you must provide maximum benefit to your clients by taking various exemption into consideration.

Fully Taxable Allowances

S.N Allowance Section Taxability
1 City Compensatory Allowance 10(14) Fully Taxable
2 Fixed Medical Allowance 10(14) Fully Taxable
3 Tiffin, Lunch, Dinner or Refreshment Allowance 10(14) Fully Taxable
4 Servant Allowance 10(14) Fully Taxable
5 Project Allowance 10(14) Fully Taxable
6 Overtime Allowance 10(14) Fully Taxable
7 Telephone Allowance 10(14) Fully Taxable
8 Holiday Allowance 10(14) Fully Taxable
9 Any Other Cash Allowance 10(14) Fully Taxable

Partially Taxable/Partially Exempt Allowances

S.N Allowance Section Taxability
1 House Rent Allowance (HRA)
(Click here to know more)
10(13A) & Rule 2A Least of the following is exempt:

a) Actual HRA Received

b) 40% of Salary (50%, if house situated in Mumbai, Calcutta, Delhi or Madras)

c) Rent paid minus 10% of salary

* Salary= Basic + DA (if part of retirement benefit) + Turnover based Commission

Note:

i. Fully Taxable, if HRA is received by an employee who is living in his own house or if he does not pay any rent

ii. It is mandatory for employee to report PAN of the landlord to the employer if rent paid is more than ₹ 1,00,000 [Circular No. 08 /2013 dated 10th October, 2013
2 Children Education Allowance 10 (14) Up to ₹ 100 per month per child up to a maximum of 2 children is exempt
3 Hostel Expenditure Allowance 10 (14) Up to ₹ 300 per month per child up to a maximum of 2 children is exempt
4 Transport Allowance granted to an employee to meet expenditure for the purpose of commuting between place of residence and place of duty 10 (14) ₹ 3,200 per month granted to an employee, who is blind or deaf and dumb or orthopedically handicapped with disability of lower extremities is exempt.
5 Allowance granted to an employee working in any transport business to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another place provided employee is not in receipt of daily allowance 10 (14) Amount of exemption shall be lower of following:

a) 70% of such allowance; or
b) ₹ 10,000 per month
6 Special compensatory Allowance (Hilly Areas) (Subject to certain conditions and locations) 10(14) read with rule 2BB Amount exempt from tax varies from ₹ 300 per month to ₹ 7,000 per month.
7 Border area allowance Remote Locality or allowance or Disturbed Area allowance or Difficult Area Allowance (Subject to certain conditions and locations) 10(14) read with rule 2BB Amount exempt from tax varies from ₹ 200 per month to ₹ 1,300 per month.
8 Tribal area allowance in (a) Madhya Pradesh (b) Tamil Nadu (c) Uttar Pradesh (d) Karnataka (e) Tripura (f) Assam (g) West Bengal (h) Bihar (i) Orissa 10(14) read with rule 2BB Up to ₹ 200 per month will be exempt.
9 Compensatory Field Area Allowance. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations) 10(14) read with rule 2BB Up to ₹ 2,600 per month will be exempt.
10 Compensatory Modified Area Allowance. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations) 10(14) read with rule 2BB Up to ₹ 1,000 per month will be exempt.
11 Counter Insurgency Allowance if this exemption is taken, employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations) 10(14) read with rule 2BB Up to ₹ 3,900 per month will be exempt.

(Available only to Individuals of Individual Armed Forces)
12 Underground Allowance is granted to employees working in uncongenial, unnatural climate in underground mines 10(14) read with rule 2BB Up to ₹ 800 per month will be exempt.
13 High Altitude Allowance is granted to armed forces operating in high altitude areas (Subject to certain conditions and locations) 10(14) read with rule 2BB Amount of Exemption will be limited to:

a) Up to ₹ 1,060 per month (for altitude of 9,000 to 15,000 feet)

b) Up to ₹ 1,600 per month (for altitude above 15,000 feet)

(Available only to Individuals of Individual Armed Forces)
14 Highly active field area allowance is granted to members of armed forces (Subject to certain conditions and locations) 10(14) Up to ₹ 4,200 per month will be exempt.

(Available only to Individuals of Individual Armed Forces)
15 Island Duty Allowance is granted to members of armed forces in Andaman and Nicobar and Lakshadweep group of Island (Subject to certain conditions and locations) 10(14) Up to ₹ 3,250 per month will be exempt.

(Available only to Individuals of Individual Armed Forces)

Fully Exempt Allowances under section 10

S.N Allowance Section Taxability
1 Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office 10(14) Exempt to the extent of expenditure incurred for official purposes
2 Any Allowance to meet the cost of travel on tour or on transfer 10(14) Exempt to the extent of expenditure incurred for official purposes
3 Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty 10(14) Exempt to the extent of expenditure incurred for official purposes
4 Helper/Assistant Allowance 10(14) Exempt to the extent of expenditure incurred for official purposes
5 Research Allowance granted for encouraging the academic research and other professional pursuits 10(14) Exempt to the extent of expenditure incurred for official purposes
6 Uniform Allowance 10(14) Exempt to the extent of expenditure incurred for official purposes

Allowances exempted to Specific Persons/Government Employees

- Any allowance or perquisite paid by government to its employees posted outside India is fully exempt from Income Tax.

- Any Allowances paid to judges of Supreme Court/ High Court and Compensatory Allowance paid to judges under Article  222(2) of the Constitution is fully exempt from Income Tax.

- Salary and allowances received by a teacher /professor from SAARC member state (Subject to certain conditions) is fully exempt.

- Value of rent free official residential, value of conveyance facilities including transport allowance, Sumptuary allowance, Leave travel concession received by Chairman/Member of UPSC is fully exempt.

IMPORTANT POINTS

  • To claim HRA exemption you need to live on rental accommodation. You should have rental receipts of rent paid or rent agreement with the landlord.
  • If you are paying rent but not receiving House Rent Allowance from your employer, you can claim deduction under section 80GG by furnishing form 10BA.
  • Leave Travel Allowance exemption is available only for travel within India and not abroad.

Valuation of Perquisites

Perquisites are benefits or privilege given by the employer to the employee in addition to salary/wages on the basis of his/her position. Perquisites are commonly given in kind (not in cash) by the employer.

For instance, if your employer has provided you a free domestic help for your household chores, then this additional benefit will be treated as perquisite in your hands.

Just like allowances, perquisites are also classified into fully taxable, partially taxable and fully exempt.

Taxable value of perquisites are added to the Salary income while calculating ‘Income from Salary’ and income tax is calculated.

#1. Valuation of Rent Free Unfurnished Accommodation

Some employers provide accommodation facility to their employees as an additional privilege. Accommodation may be owned by the employer or it may be taken on lease or rent by the employer. It may include giving place to stay in a house, a flat, farm house, in a hotel, service apartment, guest house or any other structure.

Valuation of rent free unfurnished accommodation is divided into two categories and taxability is determined on the basis of these categories:

  • Central and State Government Employees (Government Employee)

  • Private Sector Employees

Central and State Government Employees
[Section (17)(2)(i)]
Taxable value of perquisite will be deemed to be equal to the license fees determined by government for allotment of houses to its officers.
Private Sector Employees
[Section 17(2)(ii)]
Taxable value of perquisite will be calculated as follows-

i) If accommodation is owned by the employer, taxable value will be:

a) 15% of Salary, if the city where accommodation is provided has population less than 25 Lakh.
b) 10% of Salary, if the city where accommodation is provided has population more than 10 Lakh but less than 25 Lakh.
c) 7.5% of Salary, if accommodation is provided elsewhere.

ii) If accommodation is taken on lease or rent by the employer, taxable value will be
a) 15% of Salary, or
b) lease rent paid or payable by the employer.
whichever is less.

For the purposes of calculating taxable value of perquisite, Salary Includes :

a) Basic Pay

b) Dearness Allowance

c) Bonus

d) commission

e) fees

f) taxable part of all other allowances

g) any monetary payment chargeable to tax

But the above does not include :

a) Employer’s contribution to PF

b) Value of perquisites as per section 17(2)

c) retirement benefits

IMPORTANT POINTS

  • Value of rent-free accommodation provided in remote area is exempt from income tax.
  • Rent-free accommodation provided to Judges of High Courts/Supreme Court, official of Parliament, a Union Minister, a leader of Opposition and serving members/Chairman of UPSC is exempt from tax.
  • Accommodation of temporary nature provided to employee working at a mining site/onshore oil exploration site/project execution site/dam site/offshore site, is not chargeable to tax.
  • If any rent is recovered from the employee, it will be reduced from the taxable value of perquisite.

Illustration

Mr. Aman is a Senior Content Manager at TaxFactor Consultancy in Pune. He gets following emoluments during F.Y. 2017-18.

Basic Salary - ₹ 9,60,000

Bonus - ₹ 1,20,000

City Compensatory Allowance - ₹ 7,500

Hostel Expenditure Allowance for 2 children - ₹ 15,800


He is also provided with a house taken on lease by TaxFactor in Pune for his residential purposes. Lease paid by TaxFactor is ₹ 12,000 per month. 

Calculate Value of Taxable Perquisite.

 

Solution:

Salary for the purposes of determining taxable value is ₹ 10,96,100 [₹ 9,60,000 + ₹ 1,20,000 + ₹ 7,500 + ₹ 8,600 (₹ 15,800 - ₹ 300*2*12)].


Lease paid for 12 months = ₹ 144,000 [ ₹ 12,000 x 12]

Taxable value of perquisite is:

- 15% of ₹ 10,96,100 i.e. ₹ 1,64,415 or,

- lease rent paid i.e. ₹ 1,44,000

whichever is less.


Therefore, taxable value is ₹ 1,44,000. 


Now, if the house was owned by the employer, then taxable value would be ₹ 1,64,415 being 15% of the Salary. (Population of Pune is more than 25 Lakh)


#2. Valuation of Rent Free Furnished Accommodation

Accommodation is furnished when basic things like, television, refrigerator, air-conditioners and other household appliances are provided.

Taxable value of rent free furnished accommodation will be calculated as follows:

Step 1 : Calculation value of perquisite assuming that accommodation is unfurnished

Step 2 : Add 10% (per annum) of the original cost of furniture, of owned by the employer or actual hire charges paid or payable for furniture (if taken on rent/lease by the employer).

Step 3 : Reduce the amount of rent, if any, recovered from the employee.

If accommodation is provided in hotel, the taxable value of perquisite will be lower of the following :

a) 24% of the Salary paid or payable or,

b) actual charges paid or payable to the hotel

However, if accommodation provided in hotel is on account of transfer of employee from one place to another and is not exceeding 15 days in aggregate, then nothing will be chargeable to tax.

#3. Perquisite in respect of free domestic help 

Any benefit provided to the employer or his family by the employer in the form of sweeper, gardner, house maid, watchman or personal attendant will be taxable. The taxable value of this perquisite will be the actual cost borne by the employer. If employer has paid some amount from his/her pocket, then it will be reduced from the taxable value.

#4. Perquisite in respect of free gas, electricity or water supply

Value of taxable perquisite will be calculated as follows :

Step 1 : Find out cost to the employer

Step 2 : Subtract any amount recovered from employee

If gas electricity or water supply is purchased by employer from outside, then taxable value of perquisite will be amount paid or payable to the outside party. Any amount recovered from the employee will be reduced from this amount.

If gas electricity or water supply is supplied by employer from owned resources, then taxable value of perquisite will be manufacturing cost per unit incurred by the employer. Any amount recovered from the employee will be reduced from this amount.

#5. Free Education Facilities

Education facility provided at free of cost or at concessional rates to employee’s children or family member is taxable as perquisite. Taxable value is calculated as follows:

Education Facility provided to If education institution is owned by the employer Provided in any other education institution
Children of the employee Fully Exempt if value of education facility is less then ₹ 1,000 per month per child Fully Exempt if value of education facility is less then ₹ 1,000 per month per child
If it exceeds ₹ 1,000 per month per child -

Taxable value = Cost of Education in similar institution (-) ₹ 1,000 per month per child (-) amount recovered by employee
If it exceeds ₹ 1,000 per month per child -

Taxable value = Amount incurred by employer (-) ₹ 1,000 per month per child (-) amount recovered by employee
Other Family Member Taxable value = Cost of Education in similar institution (-) amount recovered by employee Taxable value = Cost of Education incurred (-) amount recovered by employee

IMPORTANT POINTS

  • Amount spent on providing free education facility/ trainings to employees is fully exempt.
  • Reimbursement of education expenditure of family member or children of the employee is fully taxable.
  • Scholarship given by employer on its sole discretion to the children of employee is not taxable as perquisite in the hands of employee.

#6. Leave Travel Concession (LTC) in India

Leave Travel Concession (LTC) is an assistance given by employer to employee for traveling anywhere in India along with his/her family. It is is exempt under section 10(5) only if journey is performed in India.

Situations Amount of Exemption if journey taken is on or after October 1, 1997
Where Journey is performed by air Amount of air economy class fare of the Airlines or actual amount spent, whichever is less
Where Journey is performed by rail Amount of air-conditioned first class rail fare or actual amount spent, whichever is less
Where the places of journey and destination are connected by rail and journey is performed by any other mode of transport Amount of air-conditioned first class rail fare or actual amount spent, whichever is less
Where the places of journey and destination (or part thereof) are not connected by rail and other recognisable public transport exists Amount of first class or deluxe class fare or the actual amount spent, whichever is less.
Where the places of journey and destination (or part thereof) are not connected by rail and no recognisable public transport exists Amount of air-conditioned first class rail fare (as if journey had been performed by rail) or actual amount spent, whichever is less

To learn more about LTA / LTC, read this guide.

#7. Employee’s obligation met by employer

Any kind of amount paid by employer which otherwise would have been payable by employee is fully taxable.

#8. Amount paid for Life Insurance of Employee

Any amount paid by the employer to effect an assurance on the life of the employee will be taxable in the hands of employee.

#9. Interest Free loan or Loan at concessional rate of interest

Many employers especially banks provide loans to their employees at concessional rate of interest or interest free loan. This benefit received by the employees is chargeable to tax as perquisite in the hands of employee. It is taxable as follows :

Step 1 : Find out the ‘maximum outstanding monthly balance’ (of all the loans as on last day of each month)

Step 2 : Find out comparable interest rate charged by SBI on 1st April in which the loan was taken (as SBI would have charged for the same loan).

Step 3 : Compute interest for each month on the outstanding amount mentioned in Step 1 at the rate mentioned in Step 2. If loan is provided at concessional rate, then compute interest with differential interest rate.

Step 4 : From the interest calculated in Step 3 deduct interest actually recovered from the employee, if any.  This is the taxable amount of perquisite.

IMPORTANT POINTS

  • Nothing will be taxable if amount of loan (or loans) does not exceed ₹ 20,000 in aggregate.
  • Nothing will be taxable if loan is provided for treatment of specified diseases (Rule 3A) like neurological diseases, Cancer, AIDS, Chronic renal failure, Hemophilia (specified diseases). However, exemption is not applicable if covered under insurance scheme and loan amount has been reimbursed by the insurance company.

Illustration

Mr. Karthik was employed by Taxfactor. On 1st October 2017, company gives him housing loan of ₹ 40,00,000 at 4% per annum interest rate. The loan is to be repaid in monthly installments of ₹ 30,000 starting from 1st January 2018. The lending rate of SBI on similar loan on 1st April 2017 is 8.65% per annum.


The differential interest rate is 4.65% (8.65% - 4%).

Maximum monthly outstanding amount on last day of each month and interest @ 4.65% :

31st October 2017 - ₹ 40,00,000 x 4.65% x 1/12 = ₹ 15,500

30th November 2017 - ₹ 40,00,000 x 4.65% x 1/12 = ₹ 15,500

31st December 2017 - ₹ 40,00,000 x 4.65% x 1/12 = ₹ 15,500

31st January 2018 - ₹ 39,70,000 x 4.65% x 1/12 = ₹ 15,384

28th February 2018 - ₹ 39,40,000 x 4.65% x 1/12 = ₹15,268

31st March 2018 - ₹ 39,10,000 x 4.65% x 1/12 = ₹ 15,151


Therefore, total taxable perquisite is ₹ 92,303 for F.Y. 2017-18.


#10. Perquisite in respect of use of movable assets :

If as an employee you or your family member are using any movable assets other than laptop/computer or car which belongs to your employer, then it will be treated as perquisite. It will be taxed as follows :

  • If asset is owned by employer, taxable value will be 10% per annum of actual cost of asset less any amount recovered from the employee.

  • If asset is taken on hire, taxable value will be amount of rent or hire charges paid or payable less any amount recovered from the employee.

#11. Transfer of Movable assets by employer to employee at nominal price

Some employees transfer the ownership of movable assets like computers/laptop, motor car etc to the employee nominal price after certain period of time. This benefit derived by employee is treated as perquisite and is taxable. The value of taxable perquisite will be calculated as follows:

Assets Value of taxable perquisite
Computers/Laptops and Electronic Items Actual Cost of asset less 50% depreciation for each completed year of usage by employer (WDV method) less amount recovered from the employee
Motor Car Actual Cost of asset less 20% depreciation for each completed year of usage by employer (WDV method) less amount recovered from the employee
Any other movable asset Actual Cost of asset less 10% depreciation for each completed year of usage by employer (SLM method) less amount recovered from the employee

#12. Valuation of perquisite in respect of motor car

Conditions Engine less than 1.6 Litre or 1600cc Engine more than 1.6 Litre or 1600cc
Where car is owned or hired by employer and maintenance and where maintenances and running expenses including remuneration of the chauffeur are met or reimbursed by the employer.
Used wholly and exclusively in the performance of official duties. Fully Exempt Fully Exempt
Used only for personal purposes of the employee or any member of his/her household Value of Taxable perquisite = Actual amount incurred by employer including remuneration of the chauffeur plus normal wear tear of the motor car at 10 % per annum of the cost of vehicle less any amount recovered from the employee.
Used partly for official purposes and partly for personal purposes Taxable value will be ₹ 1,800 per month ( ₹ 900 per month if chauffeur is provided) Taxable value will be ₹ 2,400 per month ( ₹ 900 per month if chauffeur is provided)
Where car is owned or hired by employer and maintenances and running expenses are met by the employee.
Used wholly and exclusively in the performance of official duties. Fully Exempt Fully Exempt
Used only for personal purposes of the employee or any member of his/her household. Value of Taxable perquisite = Expenditure incurred by employer (i.e. hire charges, if car is on rent or normal wear and tear at 10% of actual cost of the car, if car is owned by the employer) plus remuneration of the chauffeur if paid or payable by the employer less any amount recovered from the employee.
Used partly for official purposes and partly for personal purposes Taxable value will be ₹ 600 per month ( ₹ 900 per month if chauffeur is provided) Taxable value will be ₹ 900 per month ( ₹ 900 per month if chauffeur is provided)
Where motor car is owned by the employee and maintenance and running expenses including remuneration of the chauffeur are met or reimbursed by the employer
The reimbursement is for the use of the vehicle wholly and exclusively for official purposes. Fully Exempt. Not a perquisite Fully Exempt. Not a perquisite
The reimbursement is for the use of the vehicle exclusively for the personal purposes of the employee or any member of his household (taxable in case of specified employee as well as non-specified employee) Actual Expenditure incurred by the employer less any amount recovered from the employee.
The reimbursement is for the use of the vehicle partly for official purposes and partly for personal purposes of the employee or any member of his household Taxable Value = Actual expenditure incurred by the employer less ₹ 1800 per month and ₹ 900 per month if chauffeur is also provided less amount recovered from employee Taxable Value = Actual expenditure incurred by the employer less ₹ 2400 per month and ₹ 900 per month if chauffeur is also provided less amount recovered from employee
Where the employee owns any other automotive conveyance and actual running and maintenance charges are met or reimbursed by the employer.
The reimbursement is for the use of the vehicle wholly and exclusively for official purposes. Fully Exempt. Not a perquisite Fully Exempt. Not a perquisite
The reimbursement is for the use of the vehicle partly for official purposes and partly for personal purposes of the employee. Actual expenditure incurred by the employer as reduced by ₹ 900 per month Not Applicable

#13. Free Transport provided by a transport undertaking to its employees 

Taxable value of the perquisite will be calculated at the price at which services are offered by the employer to the general public as reduced by amount recovered from the employee, if any.

#14. Free Lunch/refreshments provided  

Lunch, dinner or refreshment facility provided by the employer free of cost  is chargeable to tax. Taxable value will be calculated as follows:

Find out the cost to the employer in excess of Rs. 50 per meal

Less : Amount recovered from the employee.

For instance, if your employer is providing you lunch of Rs. 150 per meal at Rs. 40 per meal, then Rs. 60 per meal (150 - 50 - 40) will be taxable as perquisite in your hands.

Exemptions -

a) Food and non-alcoholic beverages provided during working hours in remote area or in an offshore installation are exempt.

b) Tea, Coffee or Non-Alcoholic beverages and Snacks during working hours are tax free perquisites.

#15. Travelling, touring and accommodation facility

Taxable value of perquisite shall be expenditure incurred by the employer less amount recovered from employee.

If such facility is maintained by the employer, and is not available uniformly to all employees, the value of benefit shall be taken to be the value at which such facilities are offered by other agencies to the public.

#16. Gift, Voucher or token

The value of gift, voucher or token received by employee on ceremonial occasions or otherwise in excess of Rs. 5,000 aggregating during the year shall be taxable as perquisite.

#17. Credit Card

Expenditure incurred by the employer in respect of credit card used by the employee or any member of his household less amount recovered from the employee is a taxable perquisite. 

However, credit card used for official purposes will not be taxable provided proper record is maintained by the employer.

#18. Club Facility

Expenditure incurred by the employer towards annual or periodical fees less amount recovered from the employee is a taxable perquisite.

Initial one time deposits for corporate membership paid by the employer is exempt from tax.

Expenses incurred on club facilities for the official purposes are exempt from tax.

Use of health club, sports and similar facilities provided uniformly to all employees is exempt from tax.

#19. Tax on perquisite paid by employer

Tax paid by the employer on behalf ofthe  employee on non-monetary perquisite provided to the employee is exempt from tax.

#20. Sweat Equity Shares

Taxable value of perquisite will be Fair Market value of shares or securities on the date of exercise of option by the assessee less amount recovered from the employee in respect of such shares.

#21. Medical Facility

Medical Facility in India - Expenses incurred or reimbursed by the employer for medical treatment of employee, his/her spouse, children, dependent parents, brothers and sisters in any of the following hospital is exempt from tax :

a) Hospital managed by the employer

b) Hospital maintained by the Government or Local Authority or any other hospital approved by Central Government.

c) Hospital approved by the Chief Commissioner having regard to the prescribed guidelines for treatment of the prescribed diseases.

Medical insurance premium paid or reimbursed by the employer is not chargeable to tax.

Medical Facility Outside India - Any expenditure incurred or reimbursed by the employer for medical treatment of the employee or his family member outside India is exempt to the extent of following (subject to certain conditions):

a) Expenses on medical treatment - exempt to the extent permitted by RBI

b) Expenditure incurred on travelling of patient and one attendant- exempt, only if Gross Total Income (before including the travel expenditure) of the employee, does not exceed Rs. 2,00,000.

c) Expenses on stay abroad for patient and one attendant - exempt to the extent permitted by RBI.

#22. Employer’s contribution towards approved superannuation fund 

Employer’s contribution towards approved superannuation fund in excess of Rs. 1,50,000 per year  is chargeable to tax in the hands of employee.

#23. Any other benefit or amenity by employer

This head is residual head. Any benefit or privilege provided by the employer not falling into any of the preceding heads, will be taxable under this head.

Taxable value of perquisite shall be computed on the basis of cost to the employer (under an arm’s length transaction) less amount recovered from the employee. However, expenses on telephones including a mobile phone incurred by the employer on behalf of employee shall not be treated as taxable perquisite.

Deductions from Salary Income [section 16]

Salary Income will be computed after deducting following amounts:

a) Standard deduction [w.e.f. FY 2018-19] - A standard deduction of Rs. 40,000 or amount of salary whichever is less.

b) Entertainment Allowance - This is first included in the salary income and then deduction is given. Entertainment Allowance deduction is allowed only to Government employee. The least of following will be allowed as deduction :

  1. Rs. 5,000;
  2. 20% of basic salary
  3. Actual amount of Entertainment allowance

c) Professional Tax - Actual amount of tax on employment or professional tax paid is allowed as deduction. However, if professional tax is paid by the employer on behalf of its employee then it is first included in the salary as a perquisite and then allowed as deduction.

Retirement Benefits

It is said that, ‘As you sow, so shall you reap’. In the same way, if you save for future, you retirement will be stress free. What you have invested and saved during your active professional life will help you living a better retirement life. Following are the list of benefits you can get at the time of your retirement and their taxability:

#1. Leave encashment

There may be unused leave accumulated to the credit of the employee during the course of his/her employment. Encashment of the leave by surrendering the leave standing to one's credit is known as 'leave salary'. The tax treatment of leave salary is different for government and private sector employees.

Leave Encashment At the time of retirement During the continuation of service
Encashment of unutilized earned leave by government employee Fully Exempt [section 10(10AA)(i)] Fully Taxable
Encashment of unutilized earned leave at the time of retirement by non-government employee Least of the following will be exempt from tax :

a) Actual amount received
b) Un-utilized earned leave* x Avg. monthly salary
c) 10 month average salary**
d) ₹ 3,00,000
Fully Taxable

#2. Gratuity

Gratuity is a monetary benefit given to the employee at the time of his/her retirement. Gratuity is taxable in following manner :

Gratuity received by government Employees Any death cum retirement gratuity received by employees of Central Government, State Government or local authorities is fully exempt from tax.
Gratuity received by other employees who are covered under Gratuity Act (non-government employees) Least of the following is exempt from tax :

a) (*15/26) x Last drawn salary** x completed year of service or part thereof in excess of 6 months.

b) ₹ 10,00,000

c) Gratuity actually received.

* 7 days in case of employee of seasonal establishment

** Last drawn salary = Salary including DA but excluding any bonus, commission, HRA, overtime and any other allowance, benefits or perquisite.
Gratuity received by other employees who are not covered under Gratuity Act (non-government employees) Least of the following is exempt from tax :

a) Half month’s Average Salary* x completed years of service
b) ₹ 10,00,000
c) Gratuity Actually received

* Average salary = Average Salary of last 10 months immediately preceding the month of retirement
Salary = Basic +DA

#3. Pension

Pension will be taxable as follows :

Pension received from UNO by employee or his family member Fully Exempt
Family Pension received by the family members of Armed
Forces
Fully Exempt
Family Pension received by the family members in other cases Out of total pension received, following will be exempt :

1/3rd of the pension or ₹ 15,000, whichever is lower
Commuted Pension received
by an employee of Central Government, State Government, Local Authority
Employees and Statutory
Corporation
Fully Exempt
Commuted Pension received
by other employees who also
receive gratuity
1/3rd of full value of commuted pension will be exempt from tax.
Commuted Pension received
by other employees who do not receive any gratuity
1/2 of full value of commuted pension will be exempt from tax.
Uncommuted pension received by government as well as non-government employees Fully taxable as salary.

IMPORTANT POINTS

Commuted Pension which is lump sum payment received at the time of retirement. Un-commuted pension which is monthly pension received by employee after retirement.


#4. Voluntary Retirement

Any amount received by way of Voluntary Retirement Scheme will be treated as follows:

Least of the following is exempt from tax:

a) Actual amount received as per the guidelines i.e. least of the following:

  • 3 months salary for each completed year of service
  • Salary at the time of retirement x No. of months of services left for retirement; or

b) Rs. 5,00,000

#5. Employees Provident Funds

The tax treatment of contribution made to various provident funds are described as below :

Particulars Statutory Provident Fund Recognized Provident Fund Unrecognized Provident Fund Public Provident Fund
Employers contribution to provident fund Fully Exempt Exempt only to the extent of 12% of salary Fully Exempt -
80C deduction on employees contribution Available Available Not Available Available
Interest credited on provident fund Fully Exempt Exempt only to the extent rate of interest does not exceed 9.50% Fully Exempt Fully Exempt
Payment received at the time of retirement or termination of service Fully Exempt Fully Exempt (Subject to certain conditions and circumstances) Fully Taxable
(except employee’s contribution)
Fully Exempt

Salary = Basic + Dearness Allowance (to the extent it forms part of retirement benefits) + commission received as a fixed percentage of turnover

Payment from recognized provident fund shall be exempt in the hands of employees in following circumstances:

a) If employee has rendered continuous service with his employer (including previous employer, when PF account is transferred to current employer) for a period of 5 years or more,

b) If employee has been terminated because of certain reasons which are beyond his control (ill health, discontinuation of business of employer, etc.)

Computation of Income tax on Salary

Particulars

Basic Salary


XXXXX

Add : Dearness Allowance

XXX

Add : Annuity

XXX

Add : Bonus

XXX

Add : Commission

XXX

Add : Arrears of Salary

XXX

`Add : House Rent Allowance

XXX

(XXX)


XXX

Add : Leave Travel Allowance

XXX

(XXX)


XXX

Add : Perquisites

Less : Perquisites Exempted

XXX

(XXX)


XXX

Add : Other Allowances

Less: Allowances Exempted

XXX

(XXX)


XXX

Add : VRS/Retrenchment Compensation

Less: Exemption

XXX

(XXX)


XXX

Add : Gratuity

Less: Gratuity Exempted

XXX

(XXX)


XXX

Add : Leave Encashment

Less : Amount Exempted

XXX

(XXX)


XXX

Add : Pension

Less: Pension Exempted

XXX

(XXX)


XXX

Add : Employers Contribution (in excess of 12% salary of employee)

XXX

Add : Interest on PF in excess of the notified amount

XXX

Gross Salary​

XXXXX

Deductions under section 16

Less : Entertainment Allowance

(XXX)

Less : Professional Tax paid

(XXX)

Income chargeable to tax under Salaries

XXXXX

How to calculate Income tax on Salary with Example

Illustration

Mrs. Aarya is a employee of TaxFactor Consultancy. She receives following emoluments during F.Y. 2017-18.


Salary - ₹ 8,96,800

Bonus - ₹ 3,800

Child Education Allowance - ₹ 6,000

Entertainment Allowance - ₹ 2,800

Free domestic help - ₹ 12,000 (₹ 8,000 is paid by Aarya)

Free domestic gas and Electricity - ₹ 8,600


She has declared investments under section 80C of ₹ 1,25,000 and under section 80D of ₹ 15,000.


Further, she has also received interest income of ₹ 10,600 during the year.


Calculate her tax liability for F.Y. 2017-18 (i.e. A.Y. 2018-19)


Solution : 

Particulars

Salary


896800

Add : Child Education Allowance

Less: Exemption (₹ 100 per month per child)

6000

(1200)


4800

Add : Bonus

3800

Add : Entertainment Allowance

2800

Add : Free Domestic Help

Add : Amount recovered from employee

12000

(8000)


4000

Add : Free gas and Electricity

8600

Gross Salary​

920800

Deductions under section 16

Less : Entertainment Allowance

(2800)

Less : Professional Tax paid

(Nil)

Income chargeable to tax under Salaries

918000

Income from Other Sources

10600

Gross Total Income

928600

Chapter VI - A Deduction

Section 80C

125000

Section 80D

15000

140000

Net Taxable Income

788600

Income Tax 

70220

Education Cess

2106

Total Income Tax Payable by Aarya

72326

TDS on Salary [Section 192]

If your salary exceed or is likely to exceed the basic exemption limit in the financial year, then tax has to be deducted at source by the employer.

The employer, at the time of payment of salary, will deduct at source income tax on salary. The TDS on salary is made on the basis of average rate of income tax. 

For instance, Mr. Sai is earning ₹ 80,000 per month as salary. He made investments under section 80C to the tune of ₹ 1,40,000 during the year. Therefore, his net taxable income for the year will be ₹ 8,20,000 [9,60,000 less 1,40,000]. Total tax payable on this amount will be ₹ 78795 [76,500 + 2295 (cess)].

The average rate of tax will be calculated as under :

(Total tax payable / Total Income) *100 i.e. (78,795 / 9,60,000)* 100 = 8.21%.

Therefore, every month tax of ₹ 6,560 [ ₹ 80,000 * 8.21%] will be deducted as TDS on salary from Mr. Sai's salary.

The tax calculated above will be based on the slab rates prevailing during the year under consideration and can be different for different year.

The amount so deducted can be verified from the Form 16 issued by the employer. To know about how to understand form 16, click here.

If you want to check whether, the TDS on salary has been deposited by the employer, you can do by viewing Form 26AS.

How to save Income tax on Salary Income - Tax Planning Tips

Everyone knows that, its hard to save income tax on salary income. Like businessman, salaried person cannot claim expenses from their income. There are limited avenues to save income tax on salary and most of the time these limited options are not fully utilized. Therefore, following points should be kept in mind, if you want to save income tax on salary :

#1. When discussing the terms of employment, make sure that dearness allowance and dearness pay always forms part of basic salary. This will reduce the tax burden on house rent allowance, gratuity, commuted pension and also on Employer's contribution to the recognized provident fund.

#2. Full utilization of section 80C, 80CCC and 80CCD(1) limit of ₹ 1,50,000. Most people don't utilize this age old method of saving tax by investing in various instruments. Apart from Life Insurance Premium and Provident Fund contribution, following deductions can be claimed under section 80C :

  • Principal installment of repayment of Housing loan;
  • Stamp duty, registration fees and other expenses incurred at the time of construction or purchase of house property;
  • Any sum paid as tuition fees for full time education of any two children;
  • Subscription to National Savings Certificates and accrued interest on it;
  • Deposit in Sukanya Samriddhi Account;
  • Contribution to pension fund (section 80CCC);
  • Contribution to National Pension System (NPS) by the employee [section 80CCD(1)];
  • An additional deduction up to₹ 50,000 can be claimed by employee under section 80CCD(1B) in respect of contribution to National Pension System (NPS). This is in addition to the ₹ 1,50,000 limit;
  • Deduction up to ₹ 50,000 can be claimed in respect of interest on loan taken for residential house property under section 80EE. The main conditions for claiming deduction under this section is that loan should be sanctioned between 1st April 2016 and 31st March 2017, loan amount should be less than ₹ 35 lakh and property value should be ₹ 50 lakh;
  • Salaried person can also claim deduction in respect of certain donations made for scientific research or rural development under section 80GGA;
  • Deduction can be claimed in respect of donation made to political parties under section 80GGC. No deduction for cash donations;

#3. If you are paying rent but not receiving House Rent Allowance from your employer, you can claim deduction of rent paid under section 80GG by furnishing form 10BA.

#4. Uncommuted pension is always taxable, so it is always preferable to receive commuted pension. Commuted pension is fully exempt in case of government employee and partially exempt from non-government employees.

#5. To claim leave travel exemption, please submit the copy of air tickets or rail tickets as evidence of journey.

#6. To substantiate the exemption claimed on house rent allowance, rent agreement, rent receipts or bank statement should be documented.

Pratik Gelda

I'm a qualified Chartered Accountant and I love to write about economics, finance, taxation and investments. My aim is to make my readers economically literate and financially independent

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