Tax

Exempt Allowances  Allowances and Perquisites provided by the Government (Central Government or State Government) to its employees who are citizens of India for rendering service outside India are not taxable – Section 10(7)  All Allowances received by Judges of High Court/Supreme Court.  Allowances received by employees of UNO.  Daily and Constituency Allowance received by MPs and MLAs u/s 10(17) a) Daily Allowance received by MPs or MLAs is fully exempt from Tax. b) Any Allowance received by MPs is fully exempt from Tax. c) All other Allowances up to ₹2,000 per month received by MLAs are exempt from Tax.  [Section 10(45)] Exemption to Chairmen and members of UPSC: Specific Perquisites and Allowances notified by the Central Government, received by both serving and retired Chairmen and members of UPSC, will be fully exempt from Income Tax. 2.1.3. Perquisites – Section 17(2) (1) General 1. Perquisite shall be taxable in the hands of employee if provided to employee or to any member of household. 2. “Member of household” shall include - (a) spouse, (b) children and their spouses, (c) parents, and (d) servants and dependants; (2) Rent Free Accommodation or Concessional Accommodation Government Employees– License fee determined by the Government Non-government Employees Nature of Accommodation Value of Perquisite Population of the city Value of perquisite Owned by employer ≤ 10 lacs 7.5% of salary > 10 lacs ≤ 25 lacs 10% of salary > 25 lacs 15% of salary Taken on rent by the Lower of: Actual rent & 15% of salary employer 51

Accommodation in hotel Lower of: Actual hotel charges & 24% of salary Note: Nothing taxable if accommodation provided for ≤ 15 days on transfer of employee from one place to another Salary for this purpose shall be of the period for which accommodation is being provided to employee and shall include: (a) Basic salary (b) DA, if provided in terms of employment (c) Taxable portion of all allowances (d) Bonus & commission (e) Any other monetary payment except any perquisite but does not include:  PF contribution made by employer  Perquisites, whether monetary or non-monetary  Arrears of salary Salary from all employers shall be taken into consideration in respect of the period during which an accommodation is provided. Arrears /Advance of salary not related to such period not be included. Furnished Accommodation In case furnishings are also provided by the employer along with accommodation, then first compute value as above, and then add 10%pa of actual cost of furnishing if owned by the employer or add actual hire charges, if taken on rent by the employer. Concessional Accommodation If anything is charged from employee in respect of accommodation, then subtract the same from value computed as above. Same provision shall be applicable for valuation of all perquisites provided to employees. More than One Accommodation If the employer has provided accommodation at two or more places because of the transfer of the employee from one place to another place, then in that case for the period of first 90 days only that accommodation will be taxed which has lower perquisite value and for the period exceeding 90 days all shall be taxed. Illustration-10 Mr. Resy has provided you with following information for AY 20-21. Basic Salary ₹60,000pm DA (20% is for retirement benefits) ₹8,000pm 52

Lunch Allowance ₹300pm Children Education allowance (1 child) ₹150pm (i) Compute the value of rent free accommodation provided to him in a city with population 6,00,000 (accommodation provided from Nov 2019 to Mar 2020). (ii) What will be the answer in case ₹1,200pm is recovered from him by the employer in this regard? (iii) What will be the answer in case accommodation is taken on rent by the employer @ ₹5,000pm and Mr. Resy was required to pay ₹1,000pm as rent to the employer? (iv) What will be the answer if along with accommodation, Air conditioner costing ₹18,000 and television (taken on rent of ₹800pm) are provided to the Mr. Resy? Solution: (i) 7.5% of [60,000 x 5 + 8,000 x 20% x 5 + 300 x 5 + (150 – 100) x 5] = 23,231 (ii) 23,231 – 1,200 x 5 = 17,231 (iii) 15% of salary = 46,463 or 5,000 x 5 = 25,000, whichever is less i.e. 25,000 – 1,000 x 5 = 20,000 (iv) 23,231 + 18,000 x 10% x 5/12 + 800 x 5 = 27,981 (3) Motor Car Facility Owned by employer or taken on rent by employer Used exclusively for personal Used partly official & partly for personal purposes purposes Aggregate of: Running & maintenance expenditure incurred by  Actual running & Employer Employee maintenance ₹1,800pm for car ₹600pm for car  Remuneration of ≤ 1.6ltrs.cc for car > ≤ 1.6ltrs. cc chauffer ₹2,400pm ₹900pm for car |  10%pa of actual cost of 1.6ltrs. cc > 1.6ltrs. cc car or actual hire charges Add: ₹900pm for chauffer provided by employer 53

Owned by employee and expenses met by employer Used exclusively for personal purposes Used partly official & partly for personal Aggregate of: purposes  Actual running & maintenance Actual expenditure incurred by the employer  Remuneration of chauffer Less: 1,800pm/2,400pm 900pm for chauffer Notes:  If car is used exclusively for official purposes, then nothing shall be taxable in the hands of employee, provided specified documents are being maintained. Specified documents: A Logbook, which contains complete details of journey undertaken for the official purpose, which may include date of journey, destination, mileage and the amount of expenditure incurred thereon. The employer gives a certificate that the expenditure was incurred wholly and exclusively for the official purposes.  If the employer has provided more than one car for partly official and partly personal purposes, then, in such a case, any one car will be taxed as per the rules of partly official and partly personal use and remaining car(s) will be taxed as per the rules of personal use. (4) Free or Concessional Education Facilities  Educational institution is owned by the employer, or Any other case  Free educational facilities are allowed in educational Value = actual cost institution by reason of his being in employment of incurred by the that employer employer Value = cost of education in similar institution No exemption of ₹1,000 in this case. Exempt = ₹1,000pm/child, not for any other member of household (5) Interest Free or Concessional Loan Value = interest computed at the rate charged per annum by the State Bank of India as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it on the maximum outstanding monthly balance. 54

Notes: (a) “maximum outstanding monthly balance” means the aggregate outstanding balance for each loan as on the last day of each month. (b) Nothing shall be taxable in case loans are made available for medical treatment of specified diseases (like cancer, tuberculosis, etc.). But, if, some amount is reimbursed under any medical insurance scheme, interest on such amount shall be taxable from the month in which it is reimbursed. (c) Nothing shall be taxable if aggregate of loans do not exceed ₹20,000. Illustration-11 Interest free loan taken for construction of house ₹2,00,000 on 01/05/2019. Loan further taken of ₹3,00,000 on 17/07/2019. Repayment made of ₹1,00,000 on 30/12/2019. Interest charged by SBI for similar loan equals to 12%pa as on 01.04.2019 and 13%pa as on 01/05/2019 and 14%pa as on 01.04.2020. Compute value of interest free loan for AY 2020-21 and AY 2021-22 assuming 4%pa recovered from employee as interest. Solution: AY 2020-21 = (2,00,000 x 2 + 5,00,000 x 5 + 4,00,000 x 4) x (12% - 4%) x 1/12 = 30,000 AY 2021-22 = 4,00,000 x (14% - 4%) = 40,000 Illustration-12 Interest free loan for treatment of specified disease of employee’s daughter ₹5,00,000 on 01/04/2019. Received ₹2,00,000 from insurance company on this account on 01/07/2019. Repaid ₹50,000 on 01/08/2019 to employer. No other repayment was made during the PY 2019- 20. Rate of SBI 9%pa. Solution:(2,00,000 x 1 + 1,50,000 x 8) x 9% x 1/12 = 10,500 (6) Use of Movable Assets Value of perquisite Nature of asset Nil Laptops & computers 10%pa of actual cost or actual hire charges Other Illustration-13 Mr. Jalmahal was provided with video camera for his personal use w.e.f. 01/08/2018. Same was purchased by employer in year 1987 for ₹18,000. WDV in the books of employer as on 01/04/2018 was ₹2,000 and FMV on that date was ₹1,200. Calculate the taxable value of perquisite for AY 2019-20& AY 2021-21 assuming he is still in possession of the same. Solution: AY 2019-20 = 18,000 x 10% x 8/12 = 1,200 AY 2020-21 = 18,000 x 10% = 1,800 55

(7) Transfer of Movable Assets Nature of Asset Value of Perquisite Computers & electronic Depreciated value @ 50% WDV for each completed year of usage items Motor car Depreciated value @ 20% WDV for each completed year of usage Any other asset Depreciated value @ 10% SLM for each completed year of usage Electronic items shall include data storage and handling devices like digital diaries, printers, etc. but shall not include household appliances like washing machine, mixers, hot plates, ovens, etc. The amounts motioned above shall be reduced by the amount, if any, paid or recovered from the employee as consideration for such transfer. Illustration-14 Compute the taxable value of perquisite for AY 2020-21 on the basis of following information: Asset Date of Purchase Cost Date of Sale Sale Price Computer June 15, 2017 40,000 August 3, 2019 4,000 Car Nov. 10, 2015 4,00,000 Sept. 14, 2019 55,000 Washing Machine Jan. 13, 2017 15,000 Feb 14, 2020 8,000 Solution: Computer = 40,000 – 50% WDV – 50% WDV = 10,000 – 4,000 = 6,000 Car = 4,00,000 – 20% WDV – 20% WDV – 20% WDV – 20% WDV = 1,63,840 – 55,000 = 1,08,840 Washing Machine = 15,000 – 10% SLM – 10% SLM = 12,000 – 8,000 = 4,000 56

(8) Medical Facilities in India Fully exempt Partially exempt  Any medical treatment in following hospitals: Aggregate of (a) Hospital maintained by employer, Government or local authority reimbursement by (b) Hospital approved by Government for its employees (c) Hospital approved by CCIT for specified diseases employer of medical  Health/medical insurance premium paid by employer treatment expenses (under an approved scheme) incurred by employee  Reimbursement of health/medical insurance premium paid by employee shall be exempt upto ₹15,000pa. Balance shall be taxable. Notes: Above said exemption shall be applicable only if medical treatment is of employee himself or of his family member (spouse, children, dependent parents, dependent brothers & dependent sisters). In case of medical treatment of any other relative, full amount shall be taxable in the hands of employee. (9) Medical Facilities Outside India Expenditure done by employer on the treatment of employee or any of his family members or reimbursement of expenditure done by employee shall be exempt as per the following: 1) Expenses on the medical treatment of employee or any member of his family shall be exempt to the extent permitted by RBI. 2) Expenses on stay abroad of the employee or any member of his family with one attendant who has gone outside India for medical treatment are exempt to the extent permitted by RBI. 3) Travelling expenses of patient and one attendant who accompanies the patient in connection with such treatment shall be exempt from Tax if Gross Total Income (before including such travel expenses) is equal to or is less than ₹2,00,000. 57

(10) Leave Travel Concession – Section 10(5) U/s 10(5), travelling expenses borne by employer shall be exempt to the extent of the following limits: Travel by air Travelling by any other mode Fare of economy class of  Fare of first class A/c coach of rail Air India  Fare of first class or deluxe class of public transport system  Fare of first class A/c coach for similar distance Notes: (a) Travelling should be in India only (b) Exemption available for travelling of employee himself & of family members (spouse, children, dependent parents, dependent brothers & dependent sisters). For travelling of other relatives, full amount shall be taxable in the hands of employee. (c) Exemption for children shall be for all children born before 01/10/1998 plus 2 eldest children born on or after 01/10/1998. (d) Exemption available in respect of 2 journeys performed in a block of 4 calendar years i.e. 2010-2014, 2014-2017, etc. (e) One such unavailed journey can be carried forward to the calendar year immediately succeeding the end of relevant block. (f) Traveling not covered above; and expenses of touring & accommodation shall be fully taxable in the hands of employee. (11) Other Perquisites Nature of perquisite Value of perquisite 1. Provision of domestic  sweeper, a gardener, a watchman or a personal attendant servants  actual cost to the employer 2. Supply of gas, electric  Resources owned by the employer – manufacturing cost energy or water  Otherwise, actual cost to the employer 3. Free food and non-  Actual cost to the employer alcoholic beverages  Following shall be exempt:  Meal value upto ₹50/meal during office hours at business premises or through non-transferable vouchers  Tea & snacks during office hours without any limit 4. Gift in kind or voucher  Actual cost to employer  Exempt if upto ₹5,000 58

5. Credit Card for  Membership fees & annual fees incurred by employer personal purposes 6. Club/sports/health  Actual cost to the employer (including annual or periodical facilities fees)  Following shall be exempt  Corporate membership charges  Nothing taxable if club facilities are uniformly provided to all employees 7. Life Insurance  Actual cost to the employer Premium 8. Premium of accident  Nothing taxable policies 9. Telephone facility at  Nothing taxable residence 10. Sweat equity shares  Value = FMV of such shares on the date of exercising the option.  But perquisite shall be taxable in the year in which such shares are actually allotted to the employee.  Further CoA of such shares shall be FMV as considered above and POH shall start from the date of allotment. FMV  Listed equities: average of opening and closing price of shares listed on stock exchange on date of exercise of option  Unlisted equities: determined by the Category-I Merchant Banker on the date of exercise of option or any earlier date, not being earlier than 180 days than the date of exercising (12) Specified Employee (i) Director employee (ii) An employee who has substantial interest in the company (iii) An employee whose income u/h ‘salaries’ (excluding non-monetary benefits) exceeds ₹50,000. Impact Thereof Perquisites mentioned below shall be taxable for specified employees only. In other words, for specified employees, all perquisites shall be taxable. For employees, other than specified employees, following perquisites shall be exempt: 1. Provision of motor car by employer 2. Provision of domestic servants (sweeper, a gardener, a watchman or a personal attendant) by employer 59

3. Provision of supply of gas, electric energy or water by employer 4. Provision of education facilities by employer It may be noted that above said perquisites shall be exempt for employees, other than specified employees, only if such perquisite is provided by employer. In case employee himself avails the facility and then gets the reimbursement from the employer, then it shall be taxable for all employees (without considering nature of employee). 2.1.4. Retirement Benefits (1) Pension – Section 10(10A) Uncommuted Pension: Uncommuted pension refers to pension received periodically. It is fully taxable in the hands of both government and non-government employees. Commuted Pension: Commuted pension means lump sum amount taken by commuting the whole or part of the pension. Its treatment: (a) Government Employees - Fully exempt. (b) Non-Government Employee: Following shall be exempt If the employee is in receipt of gratuity, Exemption=1/3 of the amount of pension which he would have received had he commuted the whole of the pension. =  1  commuted pension received  100%  3 commutation % If the employee does not receive any gratuity Exemption=1/2 of the amount of pension which he would have received had he commuted the whole of the pension. =  1  commuted pension received  100%  2 commutation % Family Pension Pension received or receivable by family members after the death of the employee is known as Family Pension and it is taxable under the head of ‘Other Sources’ as per Section 56 for such family member. But deduction under Section 57 is allowed which is lower of: (a) 1/3 of such Family Pension (b) ₹15,000 Illustration-15 Compute taxable pension in the hands of Mr. X in the following cases: (i) He receives pension @ 1,500pm from ABC Ltd. during PY 2019-20. (ii) He receives pension @ 900pm from CG during PY 2019-20. 60

(iii) He left job of M/s ABC & associates on May 31, 2019 and thereafter received pension @ 1,000pm. (iv) He left job of Rajasthan Govt. on June 30, 2019. He was entitled to pension @ 2,000pm. On 01/01/2018 he got 40% of pension commuted for ₹50,000. (v) He left job of XYZ Co. on July 31, 2019 and was entitled to pension @ 3,000pm. On 01/12/2019 he got 70% of pension commuted for ₹35,000. Assume that he received Gratuity at the time of retirement. Solution: (i) ₹1,500 x 12 = ₹18,000 (ii) ₹900 x 12 = ₹10,800 (iii) ₹1,000 x 10 = ₹10,000 (iv) Uncommuted pension = ₹2,000 x 6 + ₹1,200 x 3 = ₹15,600 Commuted pension = fully exempt (v) Uncommuted pension = 3,000 x 4 + 900 x 4 = 15,600 Commuted pension = ₹35,000 – [1/3 x 35,000 x 100/70] = ₹18,333 (2) Gratuity – Section 10(10) Government Employees– fully exempt Non-government employees covered by the Payment of Gratuity Act, 1972 Least of the following shall be exempt: (i) ₹10,00,000 (ii) Gratuity actually received (iii) 15 days’ salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months Note:Salary for this purpose means basic salary and dearness allowance (whether forming part of retirement benefits or not). No. of days in a month for this purpose, shall be taken as 26. Non-government employees not covered by the Payment of Gratuity Act, 1972 Least of the following shall be exempt: (i) ₹10,00,000 (ii) Gratuity actually received (iii) Half month’s salary (based on last 10 months’ average salary immediately preceding the month of retirement or death) for each completed year of service (fraction to be ignored) Note:Salary for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits, forming part of salary and commission which is expressed as a fixed percentage of turnover. 61

Notes: (1) Gratuity received during the period of service is fully taxable. (2) The exemption in respect of gratuities would be available even if the gratuity is received by the widow, children or dependents of a deceased employee, but all calculations shall be u/h IOS. (3) Monthly contributions by Employer shall have no tax treatment in the hands of employee in the year of contribution. Illustration-16 Mrs. J retired on 11/10/2019 after serving for a period of 25yrs. 9 months & received gratuity of ₹7,50,000. Calculate taxable gratuity on the basis of following information as on date of retirement: Basic salary : ₹5,000pm (received increment of ₹500 w.e.f. 01/04/19) DA : ₹2,000pm (70% forming part of retirement benefits) Bonus : ₹15,000 Solution: (i) Govt. employee – fully exempt (ii) Private sector employee covered by the Payment of Gratuity Act, 1972 (a) 10,00,000 (b) 7,50,000 (c) 15/26 x (5,000 + 2,000) x 26 = 1,05,000 [Exempt] (iii) Private sector employee not exempt covered by the Payment of Gratuity Act, 1972 (a) 10,00,000 (b) 7,50,000 (c) 1/2 x 6,200 x 25 = 77,500 Salary: [(Basic - 5,000 x 6 + 4,500 x 4) + (DA – 2,000 x 70% x 10)]/10 = 6,200 Illustration-17 Mr. Shah, an Accounts Manager, has retired from JK Ltd. on 15-01-2020 after rendering services for 30 years 7 months. His salary is ₹25,000/- p.m. upto 30-09-19 and ₹27,000/- thereafter. He also gets ₹2,000/- p.m. as dearness allowance (55% of it is part of salary for computing retirement benefits). He is not covered by the Payment of Gratuity Act, 1972. He has received ₹8 Lacs as gratuity from the employer company. 62

Solution: Computation of gratuity taxable in the hands of Mr. Shah for the AY 2020-21 Least of the following shall be exempt ₹ (i) Gratuity received 8,00,000 (ii) Half-month’s salary for every year of completed service 4,00,500 (15/30 x 30 x {25,000 x 7 + 27,000 x 3 + 2,000 x 10 x 55%}/10) 10,00,000 (iii) Monetary limit Therefore, ₹4,05,000 shall be exempt and balance of ₹3,95,000 ( ₹8,00,000 less ₹4,05,000) shall be taxable. (3) Leave Salary – Section 10 (10AA) Government employees– fully exempt Non-government employees: Least of the following shall be exempt: (i) ₹3,00,000 (ii) Leave salary actually received (iii) 10 months’ salary (on the basis of average salary of last 10 months) (iv) Cash equivalent of leave (based on last 10 months’ average salary immediately preceding the date of retirement) to the credit of the employee at the time of retirement. Earned leave entitlement cannot exceed 30 days for every year of actual service rendered. Notes: 1. Leave salary received during the period of service is fully taxable for all employees. 2. “Salary” for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits and commission which is expressed as a fixed percentage of turnover. 3. The leave salary paid to the legal heirs of the deceased employee is not taxable. Illustration-18 Mr. K left job after working for 9 years. He was entitled to 45 days leave every year. Calculate taxable part of leave encashment of ₹70,000 assuming he used actually 22 days leaves every year. Basic salary was ₹5,000pm. Solution: Taxable = [7,00,000 – 12,000] = 58,000 (a) 3,00,000 (b) 70,000 63

(c) 10 x 5,000 = 50,000 (d) 72/30 x 5,000 = 12,000 [Exempt] Unavailed leaves: (30-22) x 9 = 72 days Salary: (5,000 x 10)/10 = 5,000 Illustration-19 Mr. K left job after working for 9 years& 7 months on November 15, 2019. He was entitled to 44 days leave every year. Calculate taxable part of leave encashment of ₹70,000 assuming he used actually 20 days leaves every year. Salary information as on date of retirement: Basic salary was ₹5,000pm (received increment of ₹400 w.e.f. May 1, 2019), DA 30% of basic salary (40% forming part of retirement benefits), commission 2% of turnover (Turnover ₹9,00,000 for PY 2019-20 and ₹6,00,000 for PY 2018-19). Solution: Taxable LS = [70,000 – 20,455] = 49,545 (a) 3,00,000 (b) 70,000 (c) 10 x 6,818.20 = 68,182 (d) 90/30 x 6,818.20 = 20,454.60 [Exempt] Unavailed leaves: (30-20) x 9 = 90 days Salary: 68,182/10 = 6,818.20 Basic – 5,000 x 6.5 + 4,600 x 3.5 = 48,600 DA – 48,600 x 30% x 40% = 5,832 Commission – 9,00,000 x 2% x 7.5/12 + 6,00,000 x 2% x 2.5/12 = 13,750 Illustration-20 What shall be your answer in case he was allowed 28 leaves every year? Solution: (a) 3,00,000 (b) 70,000 (c) 10 x 6,818.20 = 68,182 (d) 72/30 x 6,818.20 = 16,363.68 [Exempt] Unavailed leaves: (28-20) x 9 = 72 days Salary:68,182/10 = 6,818.20 Basic – 5,000 x 6.5 + 4,600 x 3.5 = 48,600 64

DA – 48,600 x 30% x 40% = 5,832 Commission – 9,00,000 x 2% x 7.5/12 + 6,00,000 x 2% x 2.5/12 = 13,750 (4) Compensation Received on Voluntary Retirement – Section 10(10C) Least of the following shall be exempt: (i) ₹5,00,000 (ii) Amount actually received (iii) 3 months’ salary based on last drawn salary for each completed year of service (iv) Remaining period’s (remaining period of his service) salary based on last drawn salary Notes: 1. Salary for this purpose means basic salary and dearness allowance. 2. It applies to the employees who have completed 40 years of age or have completed 10 years of service. This condition is, however, not applicable for employee of Public Sector Companies. 3. It should apply to all categories of the employees of the organization except to Directors of the company. 4. This scheme has been drawn to achieve overall reduction in the existing strength of the employees. 5. The vacancy caused by the voluntary retirement is not to be filled up. 6. The retiring employees of the company shall not be absorbed in another company of the same management. 7. Once in lifetime option. Illustration-21 Mr. Dutta received voluntary retirement compensation of ₹7,00,000 after 30 years 4 months of service. He still has 6 years of service left. At the time of voluntary retirement, he was drawing basic salary ₹20,000 p.m.; Dearness allowance (which forms part of pay) ₹5,000 p.m. Compute his taxable voluntary retirement compensation. Solution: Taxable VRS = [7,00,000 – 5,00,000] = 2,00,000 (a) 5,00,000 [Exempt] (b) 7,00,000 (c) 3 x (20,000 + 5,000) x 30 = 22,50,000 (d) 6 x 12 x (20,000 + 5,000) = 18,00,000 65

(5) Provident Fund Particulars Recognized PF Unrecognized Statutory PF Public PF PF Employer’s Amount in excess of Fully exempt N.A. Contribution 12% of salary is Not taxable taxable yearly Eligible for Eligible for Employee’s Eligible for deduction u/s deduction u/s Contribution Not eligible for deduction u/s 80C deduction 80C 80C Fully exempt Fully exempt Interest Credited Amount in excess of Not taxable 9.5% p.a. is taxable yearly u/h salaries Amount See Note (1) See Note (2) Fully exempt Fully exempt u/s 10(11) u/s 10(11) received on retirement, etc. Notes: (1) Amount received on the maturity of RPF is fully exempt in case of an employee who has rendered continuous service for a period of 5 years or more; or termination of the service is due to ill health or discontinuance of business of employer or other causes which are beyond control of the employee; or on termination of the employment, an employee obtains employment elsewhere and the balance from the RPF account maintained by old employer is transferred to RPF account maintained by such new employer; or on death of the employee. (2) Employee’s contribution is not taxable but interest thereon is taxable u/h ‘Income from Other Sources’. Employer’s contribution and interest thereon is taxed as Salary. (3) Salary for this purpose means basic salary and dearness allowance - if provided in the terms of employment for retirement benefits and commission as a percentage of turnover. Salary shall be taken on due basis i.e. shall be for the period for which calculations is being made. Illustration-22 Compute income u/h salaries from the following information for PY 2019-20: Basic salary 5,000pm (6,000pm w.e.f. 01/09/19) DA (60% forming part of retirement benefits) 70% of basic salary Employer’s & own contribution towards RPF 13,000 each Interest credited to RPF @ 14% 3,500 66

Solution: 13,000 ₹ Particulars 11,417 67,000 Basic Salary (5,000 x 5 + 6,000 x 7) 3,500 46,900 DA (70% of 67,000) 2,375 Employer’s contribution to RPF 1,583 Less: Exempt [(67,000 + 60% of 46,900) x 12%] Interest credited to RPF 1,125 Less: Exempt (3,500 x 9.5% / 14%) 1,16,608 Less Standard Deduction Section 16(ia) 50000 66,608 (6) Approved Superannuation Fund – Section 10(13) (i) Employer’s contribution is exempt from tax in the hands of employee (upto ₹1,50,000 per employee per annum). Contribution exceeding ₹1,50,000 is taxable in the hands of the respective employee; (ii) Employee’s contribution qualifies for deduction u/s 80C; (iii) Interest on accumulated balance is exempt from tax. (iv) Payment from the fund is not chargeable to tax. 2.1.5. Profit in Lieu of Salary – Section 17(3) Profits in lieu of salary include: 1) The amount of compensation received by the employee in connection with (a) termination of the employment (b) modification of the terms and conditions of employment. 2) Any payment due or received by employee from his employer under Keyman Insurance Policy including any bonus on such policy [Section 10(10D)] 3) Any sum due or received, whether in lump sum or otherwise, by any person whether before joining or after cessation of his employment. 4) Mr. J is marketing director of Pepsi India Ltd. and retired from the company on 31/3/2018. Apart from other payments, company gives him ₹25 lakhs under a contract that Mr. J will not join Coca Cola Ltd. for period of ten years. This ₹25 lakhs received by Mr. J is known as profit in lieu of salary and shall be taxable under the head of Salary. 5) Mr. J Joins the service of ABC Ltd. Apart from his salary, company gives him ₹25 lakhs under the agreement that he will not leave the company for five years. This amount of ₹25 lakhs will be taxable as profit in lieu of salary. 67

6) Mr. J is an employee of XYZ Ltd. and he is head of North India Division. The company appointed him as a head of North India for ten years. However, after four years, he was transferred to South India and the company paid him cash of ₹3,00,000 as a compensation. This ₹3,00,000 will be known as profit in lieu of salary and it will be taxable under head of Salary. 7) SONY TV has a hit program running on its channel called KBC. Sony TV takes a Keyman insurance policy on the life of Amitabh Bachan. On maturity of the policy, company gives compensation to Sony TV. This amount shall be taxable under the chapter of income from business and profession for Sony TV. But if insurance company gives money to Amitabh Bachan, then it shall be taxable for Amitabh Bachan as profit in lieu of salary u/s 17(3) if Amitabh Bachan and Sony TV have employer–employee relationship. However, if they do not have employer – employee relationship, then it will be taxable for Amitabh Bachan as Income from Other Sources u/s 56. 2.1.6. Deductions from Salaries – Section 16 Entertainment Allowance 1. Entertainment Allowance is given to an employee to meet out the expenditure done for entertaining guests of the employer for business purposes. In other words, Entertainment Allowance is given to the employee for meeting expenses of hospitality of business customers and business clients. 2. Entertainment allowance received is fully taxable for all employees and is first to be included in the salary. 3. However deduction in respect of entertainment allowance is available in case of Government employees. The amount of deduction will be lower of: (i) One-fifth of his basic salary or (ii) ₹5,000 or (iii) Entertainment allowance received. 4. Amount actually spent by the employee towards entertainment out of the entertainment allowance received by him is not a relevant consideration at all. Illustration-23 Mr. J is an employee of Haryana Government and gets salary of ₹8,000 pm. He receives Entertainment Allowance of ₹2,000 pm and DA of 100% of Basic Salary. Haryana Government has imposed Professional Tax upon him of ₹100 pm. On 15/3/2020, he has paid this amount for current year as well as for the next year in advance. Calculate his taxable salary for the AY 2020- 2021, i.e., PY 2019-2020. 68

Solution: ₹ Calculation of Taxable Salary for the AY 2020-2021, i.e., PY 2019-2020 96,000 Particulars 24,000 Basic Salary (8,000 x 12) 96,000 Entertainment Allowance (2,000 x 12) 2,16,000 DA (100% of Basic Salary) 5,000 Gross Salary 2,400 Less: 16 (ii) Entertainment Allowance (Working Note) 50000 Less: 16 (iii) Professional Tax paid (100 x 12 x 2) 1,58,600 Less Standard Deduction 16(ia) Taxable Salary Calculation of deduction of Entertainment Allowance ₹ Particulars Deduction is least of 24,000 Actual amount received 19,200 20% of salary , i.e., 20% of ₹96,000 5,000 Maximum limit of Professional Tax [Section 16(iii)] 1. Professional tax is a State Levy. 2. Deduction is allowed on actual payment basis. 3. If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount so paid is first included as salary income and then allowed as a deduction u/s 16. 4. Local Government or State Government cannot charge more than Rs.2500 per person per year. Relief when Salary, etc., is Paid in Arrears – Section 89 Step 1: Calculate tax payable for the PY in which arrears of salary are received on the following amounts: (a) Total income inclusive of additional salary (b) Total income exclusive of additional salary Difference between (a) & (b) is tax on additional salary 69

Step 2: Calculate tax payable for every PY to which the additional salary relates on the following amounts: (a) Total income inclusive of additional salary of that particular year (b) Total income exclusive of additional salary Aggregate the difference between (a) & (b) for all such Previous Years Step 3: Step 1 less Step 2 shall be the relief admissible u/s 89 for previous year in which arrears are received. In case step 1 is less than step 2, assesse need not apply for relief. In the case of Mr. Hari, aged 63 years, you are informed that the salary (after SD) for the previous year 2019-20 is ₹10,20,000 and arrears of salary received is ₹3,45,000. Further, you are given the following details relating to the earlier years to which the arrears of salary received is attributable to: Previous Year Taxable Salary Arrears Now Received ( ₹) 2010 – 2011 7,10,000 1,03,000 2011 – 2012 8,25,000 1,17,000 2012 – 2013 9,50,000 1,25,000 Compute the relief available u/s 89 and the tax payable for the A.Y. 2020-21. Note: Rates of Taxes: Assessment Slab Rates of Income-Tax Year 2011-12 For resident individuals of the age of 60 years or more at any time during the previous year For other resident individuals 2012-13 Slabs Rate Slabs Rate 2013-14 Upto ₹2,40,000 Nil Upto ₹1,60,000 Nil ₹2,40,000 - ₹5,00,000 10% ₹1,60,000 - ₹5,00,000 10% ₹5,00,000 - ₹8,00,000 20% ₹5,00,000 - ₹8,00,000 20% Above ₹8,00,000 30% Above ₹8,00,000 30% Upto ₹2,50,000 Nil Upto ₹1,80,000 Nil ₹2,50,000 - ₹5,00,000 10% ₹1,80,000 - ₹5,00,000 10% ₹5,00,000 - ₹8,00,000 20% ₹5,00,000 - ₹8,00,000 20% Above ₹8,00,000 30% Above ₹8,00,000 30% Upto ₹2,50,000 Nil Upto ₹2,00,000 Nil ₹2,50,000 - ₹5,00,000 10% ₹2,00,000 - ₹5,00,000 10% ₹5,00,000 - ₹10,00,000 20% ₹5,00,000 - ₹10,00,000 20% 70

Above ₹10,00,000 30% Above ₹10,00,000 30% Note: Education cess@2% and secondary and higher education cess@1% is attracted on the income-tax for all the year. Answer: Computation of tax payable by Mr. Hari for the A.Y 2020-21 Particulars Incl. Arrears of Excl. Arrears of Salary Salary Current year salary Add: Arrears of salary 10,20,000 10,20,000 Taxable Salary 3,45,000 – Income-tax thereon Add: H&EC @ 4% 13,65,000 10,20,000 Total Payable 2,19,500 1,16,000 8,780 4,640 2,28,280 1,20,640 Computation of tax payable on arrears of salary if charged to tax in the respective assessment years. AY 2011-12 AY 2012-13 AY 2013-14 Particulars Incl. Excl. Incl. Excl. Incl. Excl. arrears arrears arrears arrears arrears arrears Taxable salary 7,10,000 7,10,000 8,25,000 8,25,000 9,50,000 9,50,000 — 1,17,000 — 1,25,000 — Add: Arrears of 1,03,000 salary Taxable salary 8,13,000 7,10,000 9,42,000 8,25,000 10,75,000 9,50,000 Tax on the above 97,900 76,000 1,34,600 99,500 1,47,500 1,15,000 Add: Cess @ 3% 2,937 2,280 4,038 2,985 4,425 3,450 Tax payable 1,00,837 78,280 1,38,638 1,02,485 1,51,925 1,18,450 Computation of relief u/s 89 ₹₹ Particulars Tax payable in A.Y. 2020-21 on arrears: 2,28,280 1,07,640 1,20,640 Tax on income including arrears Less: Tax on income excluding arrears Tax payable in respective years on arrears: 71

Tax on income including arrears ( ₹1,00,837 + 3,91,400 92,185 ₹1,38,638 + ₹1,51,925) 2,99,215 15,455 Less: Tax on income excluding arrears ( ₹78,280 + ₹1,02,485 + ₹1,18,450) Relief u/s 89 - difference between tax on arrears in A.Y 2018-19 and tax on arrears in the respective years Tax payable for A.Y 2018-19 after relief u/s 89 ₹ Particulars 2,26,085 Income-tax payable on total income including arrears of salary 14,420 Less: Relief u/s 89 as computed above 2,11,665 Tax payable after claiming relief 72

SUMMARY Standard Deduction 1. Standard Deduction [Rs. 50,000 or the amount of salary, whichever is lower] Section 16(ia). Transport allowance and Medical allowances are replaced with standard deduction Retirement Benefits 1. Uncommuted pension – taxable. Commuted pension: 1/2 exempt (without gratuity) or 1/3 exempt (with gratuity) 2. Gratuity – ₹10,00,000 or {15/26 x salary x completed years (+ fraction > 6m) – if covered by gratuity act} or {1/2 x salary x completed years (fraction ignored) – if not covered by Gratuity Act} 3. Leave salary – ₹3,00,000 or 10 months’ salary or salary for unavailed leaves on the basis of 30 days leaves every year 4. RPF – employer’s contribution upto 12% of salary, interest @9.5%pa. Employee’s contribution to SPF/RPF is allowed as deduction u/s 80C. Allowances 1. HRA – rent paid less 10% of salary or 40%/50% of salary. If any of the factor changes, then calculations to be made for every period separately. 2. Specified allowances – some are exempt to the extent spent and some are exempt to the extent limit specified. 3. Rest fully taxable like CCA, Medical allowance, etc. 4. Transport Allowance – 1600 discontinued. Perquisites 1. If any amount recovered from employee, then first calculate value of perquisite assuming there is no recovery from employee, and then subtract the recovery from employee from such value. 2. RFA – depends upon owned by employer or taken on rent by employer. Salary for this purpose shall include any perquisite. 3. Motor car – if for personal use, then actual expenses borne by the employer shall be the value. If for mix use, then ₹1,800pm/ ₹2,400pm shall be the value. 4. Education facility – in case of education in employer’s school, ₹1,000pm/children is exempt. 5. Interest free loan – interest on the basis of interest rate of SBI as on 01/04, applying on outstanding balance on last day of each month. 6. Use of movable assets – laptop/computers – value nil. Other assets – value 10%pa of actual cost to employer or actual hire charges 73

7. Transfer of movable assets – value on the basis of 50% WDV (computers), 20% WDV (motor cars) & 10% SLM (other assets). Depreciation shall be for complete 12 months only. 8. Medical facilities – if employer/govt./approved hospital – fully exempt. Otherwise exempt upto ₹15,000pa. 9. LTC – only travelling cost exempt. Exempt upto air economy fare, first class A/c fare, and deluxe class bus fare. Exemption for new children (eldest 2) + old children (no limit). 10. Free meal, etc. – exempt upto ₹50/meal. 11. Gift in kind – exempt upto ₹5,000. Gift in money form – fully taxable. Deductions u/s 16 1. Entertainment allowance – only to Govt. employees. Lower of 1/5th of basic salary or ₹5,000. 2. Professional tax – deduction allowed on actual payment basis. 74

PRACTICE QUESTIONS Question-1 Mr. Yogesh is employed with a transport firm. He is member of an unrecognized provident fund. He has been drawing salary @ ₹10,000 p.m. since 1-1-2019. Dearness allowance, forming part of pay for superannuation benefits, is paid @ 10% of his salary. He gets house rent allowance ₹1,500 per month. He pays rent of ₹2,500 pm. He contributes @ 11% of his salary to the fund and the employer contributes @ 25%. The employer also reimburses his personal club bills amounting to ₹15,000. Besides, he is paid ₹1,400 p.m. as transport allowance. He retires 1-1-2020 after 28 years and 9 months of service. He gets ₹85,000 as accumulated balance from the provident fund. It consists of ₹20,000 as his contribution and ₹15,000 interest thereon. The employer's contribution is ₹35,000 and interest thereon is ₹25,000. He also gets gratuity of ₹2,50,000. After retirement, he gets pension @ ₹5,000 p.m. On 1-3-2020 he surrenders one half pension for a consolidated amount of ₹1,50,000. He has made the following payments/investments during the previous year 2019-20: (i) Life Insurance Premium amounting ₹5,000 on the policy taken on the life of his married son. (ii) Public provident fund deposit ₹7,000. (iii) Repayment of principal amount of ₹15,000 to the Life Insurance Corporation of India on account of loan taken for the purchases of a flat, allotted in March, 1998. (iv) Purchase of National Savings Certificates, IX issue, amounting to ₹5,000 (v) Contribution of ₹8,000 under the Jeevan Dhara Scheme of Life Insurance Corporation of India. Compute his total income and tax liability for the assessment year 2020-21. Question-2 Manas has been in service of Xansa Ltd., since November 1993, in Delhi. During the financial year ending 2019-2020 he received from the company, salary @ ₹12,000 p.m., dearness allowance @ ₹3,000 p.m., city compensatory allowance @ ₹300 p.m., entertainment allowance @ ₹500 per month and house rent allowance @ ₹4,000 p.m. Manas resides in the house property owned by his HUF for which he pays a rent of ₹5,000 p.m. He has been in receipt of entertainment allowance from company since November 1993. He retired from the service of the company on 31-12-2019 and received gratuity of ₹1,20,000 and pension of ₹5,000 p.m. He is not covered under the Payment of Gratuity Act. On 1-2- 2020 he got one half of the pension commuted and received ₹1,60,000 as commuted pension. He also received ₹3,00,000 as the accumulated balance of the recognized provident fund. Compute his income under the head salary for the assessment year 2020-21. 75

Question-3 Manish x a resident but not ordinarily resident individual, is employed by an Indian company. For the previous year 2019-20, he submits the following information: (a) Salary of 4 months of service in New York (paid by the foreign branch in USA) ₹1,20,000 (b) Salary of 8 months of service in Delhi ₹2,20,000 (c) Bonus of 2016-17 (not taxed earlier) ₹30,000 (d) Employer’s contribution towards recognized provident fund @ ₹4,000 per month for the entire previous year [provident fund is maintained in India; When Manish was posted abroad, employer’s contribution was transferred to a separate account in USA and later on along with employee’s contribution it is remitted to India] ₹48,000 (e) Free car facility in Delhi only for private purpose of Manish and his family members; Expenditure of the employer ₹58,000 (f) Car allowance in New York @ ₹11,000 per month (one third of which is utilized for private purpose) ₹44,000 Besides, the employer-company provides a rent-free furnished flat both in Delhi and New York. While lease rent of the flat provided at Delhi is ₹14,000 per month (rent of furniture: ₹9,000), lease rent of the flat provided at New York is ₹20,000 per month(rent of furniture: ₹7,000 per month). During 2019-20, Manish is paid a special allowance of $15,000 by UNO in appreciation of his services rendered in New York. His income from other sources is ₹2,10,000. On March 10, 2020, the employer sells a computer to Manish for 16,500 (it was purchased by the company for ₹62,000 an April 10, 2015 & till its transfer to Manish it was used by the employer for business purposes). Manish makes the following payments: (a) his contribution to the recognized provident fund: ₹65,000 (contribution was remitted from USA when he was posted abroad); (b) contribution to public provident fund: ₹19,000 (c) life insurance premium to an American insurance company: ₹35,000 (sum assured: ₹3,00,000); (d) investment in equity shares at a notified company which is engaged in maintaining and operating on infrastructure facility: ₹26,000; and (e) tuition fees of Manish’s son: ₹4,000 per month. Determine the taxable income and tax liability for the assessment year 2020-21 on the assumption that he holds 20 per cent equity share capital in the employer company and on April 1, 2021, he pays ₹300, being professional tax pertaining to the previous year 2019-20. Manish gets a pension of ₹10,000 per month from the Gujarat Government (date of retirement being March 31, 2015). 76

Question-4 Suman, an employee furnished the following particulars for previous year ending 31.03.2020: Particulars ₹ (a) Salary income as computed 6,00,000 (b) During the year arrears of salary were received not included in the above related to 15,000 F.Y. 2002- 03 (c) Assessed income of Financial Year 2002-03 66,000 (d) On 25.3.2018, amount deposited in Public Provident Fund Account 50,000 You are requested to compute relief u/s. 89 in terms of tax payable. The rates of tax for the A.Y. 2003-2004 are: On First ₹50,000 Nil On Next ₹10,000 10% On Next ₹90,000 20% On the balance 30% (Surcharge @ 2% when taxable income exceeds ₹60,000). Question-5 Raman has been in the service of a private company since 1st January, 2002, in Chennai. During the financial year ending 31-03-2020, he received from the company, salary ₹15,000 per month dearness allowance ₹3,000 per month, city compensatory allowance ₹400 per month, entertainment allowance ₹1,500 per month and house rent allowance ₹5,000 p.m. Raman resides in the house property owned by his father for which he pays a rent of ₹5,500 p.m. Raman has been in receipt of entertainment allowance from the company since January, 2002. Raman contributes ₹2,000 p.m. to the recognized provident fund. The company is also contributing an equal amount. Raman retires from the service of the company on 31-12-2019 when he was paid a gratuity of ₹95,000 and pension of ₹8,000 p.m. He is not covered under the Payment of Gratuity Act, 1972. On 1-2-2020, he got one-half of the pension commuted and received ₹1,95,000 as commuted pension. He also received ₹4,00,000 as the accumulated balance of the recognised provident fund. Compute his income under the head salary for the A.Y. 2020-21. Question-6 Ramesh an employee of a private sector transport company, based at Nagpur and covered by the Payment of Gratuity Act, retires on December 31, 2019 after a service of 33 years and 7 months. At the time of retirement his employer pays ₹2,76,000 as gratuity and ₹65,000 as accumulated balance of recognised provident fund. He is also entitled for a monthly pension of ₹900. He gets 70 per cent of pension commuted for ₹25,000 on February 1, 2020. The following information is available: 77

(i) Basic salary: ₹90,000 ( ₹10,000 x 9); (ii) Bonus: ₹4,000; (iii) Special Allowance: ₹25,000; (iv) House rent allowance: ₹13,500 ( ₹1,500 x 9); rent paid by him: ₹14,400 ( ₹1,200 x 12); (v) Employer's contribution towards recognised provident fund: ₹13,000; (vi) Ramesh's contribution towards provident fund: ₹15,000; (vii) Payment of insurance premium on March 31, 2020 on own life insurance policy: ₹15,000 (sum assured: ₹2,00,000, policy was taken on 09/07/2013); (viii) Professional tax paid by Ramesh: ₹1,500. Salary and pension fall due on last day of each month. As per the terms of employment, Ramesh and his family members can use deluxe buses operated by the employer-company but only once in a year (value of the facility enjoyed by Ramesh and his family members during October 2017 is ₹10,000; a sum of ₹5,000 is recovered from Ramesh). On an official tour of Ramesh to Cochin (October 10, 2019 to October 20, 2019), Mrs. Ramesh accompanies him (total expenditure incurred by employer on providing this facility to Mrs. Ramesh: ₹20,500, amount recovered from Ramesh: ₹2,000).Determine Ramesh’s total income for the assessment year 2020-21. Question-7 Ramesh was the General Manager of Amity Ltd. in Delhi. He retired from his service on 31-12-2019 after 30 years of service. The following information has been provided by him: (i) Basic Salary ₹20,000 p.m. Dearness allowance 40% of basic salary (50% of which forms part of salary for retirement benefits). (ii) House rent allowance ₹5,000 p.m. He pays ₹6,000 p.m. as rent. (iii) Medical allowance ₹1,200 p.m. (iv) A car of 1.4 ltrs. engine cubic capacity is provided by the company for official and personal use and all expenses of running and maintenance of car and salary of the driver are borne by the company. (v) The monthly expenses incurred by Ramesh on gas and electricity were ₹800 which were reimbursed by the employer. (vi) Reimbursement of educational expenses of his two children which amount to ₹450 p.m. (vii) A watchman, a sweeper & a cook have been provided to whom the company pays a salary of ₹600 p.m. each. (viii) Loan of ₹1,50,000 @ 10% p.a. for construction of his house was given by the company. SBI rate of interest is 8% p.a. (ix) He received ₹2,40,000 as gratuity. His salary for the preceding years was as under: 78

Particulars ₹ (a) Year ending 31-12-2014 (b) Year ending 31-12-2015 1,10,000 (c) Year ending 31-12-2016 1,16,000 1,20,000 (x) He received ₹1,25,000 for encashment of leave being twelve months unavailed leave of Ramesh. He was entitled to one month’s leave for every year of service. (xi) Ramesh contributes 20% of his salary to a recognised provident fund and the employer’s contribution is 10%. (xii) He has invested ₹20,000 in National Savings Certificates IX issue and ₹15,000 in public provident fund. He paid ₹10,000 towards life insurance premium. Compute the total income of Ramesh for the assessment year 2020-21. Question-8 Mr. Jaideep is a lecturer in a renowned private college in Baroda. During the previous year 2019-20, he gets the following emoluments: Basic salary: ₹1,90,000; dearness allowance: ₹12,300 (forming part of salary); city compensatory allowance: ₹3,100; children’s education allowance: ₹2,340 ( ₹65 per month for 3 children); house rent allowance: ₹16,200 (rent paid: ₹20,500) and remuneration from the Aligarh University for acting as paper setter and examiner: ₹90,000 (expenditure incurred by Mr. Jaideep: ₹3,400). He gets ₹21,233 as reimbursement from the employer in respect of expenditure incurred on medical treatment of his family members from a doctor. Besides, he gets ₹12,600 as reimbursement from the employer in respect of books and journals purchased by him for discharging his official work. He contributes 11 per cent of his salary to recognized provident fund to which a matching contribution is made by the employer. During the year, he spends ₹3,000 on purchase of books for teaching purposes (not being reimbursed by the employer). Besides, he makes, an expenditure of ₹6,000 on maintaining car for going to the college and pays ₹16,000 as insurance premium on own life insurance policy (sum assured: ₹50,000, policy was taken on 08/11/2012). Determine the total income and tax liability of Mr. Jaideep for the assessment year 2021-21. Question-9 State True or False, with reasons Mr. S is employed with T Ltd. as a Chartered Accountant. The annual membership fee of Mr. S paid by T Ltd. is not a perquisite and hence not chargeable to tax. Question-10 to one of its employees on 1.4.2019 is ₹6,00,000. Following benefits have been granted by Ved Software Ltd. Mr. Badri: (i) Housing loan @ 6% per annum. Amount outstanding Mr. Badri pays ₹12,000 per month, on 5th of each month. 79

(ii) Air-conditioners purchased 4 years back for ₹2,00,000 have been given to Mr. Badri for ₹90,000. Compute the chargeable perquisite in the hands of Mr. Badri for the A.Y. 2020-21.The lending rate of State Bank of India as on 1.4.2019 for housing loan may be taken as 10%. Question-11 How is advance salary taxed in the hands of an employee? Is the tax treatment same for loan or advance against salary? Question-12 During the financial year Mr. M is an area manager of M/s N. Steels Co. Ltd. 2019-20, he gets the following emoluments from his employer: ₹20,000 p.m. Basic Salary ₹25,000 p.m. ₹2,000 p.m. Up to 31.8.2019 From 1.9.2019 ₹500 p.m. for two Transport allowance children Contribution to recognised provident fund 15% of basic salary & D.A. ₹300 p.m. Children education allowance ₹380 p.m. for two City compensatory allowance children Hostel expenses allowance ₹5,000 p.a. ₹2,500 Tiffin allowance (actual expenses ₹3,700) Tax paid on employment Compute taxable salary of Mr. M for the Assessment year 2020-21. Question-13 Mr. Ashok Kumar, an employee of a PSU, furnishes the following particulars for the previous year ending 31.3.2020: (i) Salary income for the year ₹ (ii) Salary for Financial Year 2007-08 received during the year (iii) Assessed Income for the Financial Year 2007-08 5,25,000 40,000 1,40,000 You are requested by the assessee to compute relief u/s 89 of the Income-tax Act,1961, in terms of tax payable for assessment year 2020-21. 80

The rates of Income-tax for the assessment year 2008-09 are: (%) Nil Tax Rate 10 On first ₹1,00,000 20 On ₹1,00,000 - ₹1,50,000 30 On ₹1,50,000 - ₹2,50,000 2 Above ₹2,50,000 Education cess Question-14 (i) Mr. Khanna, an employee of IOL, New Delhi, a private sector company, received the following for the financial year 2019-20: (a) Basic pay ₹ (b) House rent allowance (c) Special allowance 1,80,000 1,20,000 1,20,000 Mr. Khanna was residing at New Delhi and was paying a rent of ₹15,000 a month. Compute the eligible exemption u/s 10(13A) of the Income-tax Act, 1961, in respect of house rent allowance received. (ii) If Mr. Khanna opts for rent free accommodation whereby IOL would be paying a rent of ₹15,000 per month to the landlord and recovers a sum of ₹5,000 per month from Mr. Khanna which was in excess of his entitlement, what will be the perquisite value in respect of such rent free accommodation? (iii) Which of the above would be beneficial to Mr. Khanna i.e., house rent allowance or rent free accommodation? Question-15 From the following particulars furnished by Mr. X for the year ended 31.3.2020, you are requested to compute his total income and tax payable for the assessment year 2020-21. (a) Mr. X retired on 31.12.2019 at the age of 58, after putting in 25 years and 9 months of service, from a private company at Mumbai. (b) He was paid a salary of ₹25,000 p.m. and house rent allowance of ₹6,000 p.m. He paid rent of ₹6,500 p.m. during his tenure of service. (c) On retirement, he was paid a gratuity of ₹4,00,000.He was not covered by the payment of Gratuity Act. His average salary in this regard may be taken as ₹24,500.Mr. X had not received any other gratuity at any point of time earlier, other than this gratuity. 81

(d) He had accumulated leave of 15 days per annum during the period of his service; this was encashed by Mr. X at the time of his retirement. A sum of ₹3,15,000 was received by him in this regard. His average salary may be taken as ₹24,500. (e) After retirement, he ventured into textile business and incurred a loss of ₹80,000 for the period upto 31.3.20. (f) Mr. X has invested ₹22,500 in recognized provident fund, ₹40,000 in public provident fund and ₹37,500 in National Savings Certificates. Question-16 (i) Smt. Savita Rani was born on 01.07.1964.She is a Deputy Manager in a Company in Mumbai. She is getting a monthly salary and D.A. (fully includible for retirement benefits) of ₹45,000 and ₹12,000 respectively. She also gets a House Rent Allowance of ₹6,000 per month. She is a member of Recognised P.F. wherein she contributes 15% of her salary and half D.A. Her employer also contributes an equal amount. (ii) She is living in the house of her minor son in Mumbai. (iii) During the previous year her minor son has earned an income of ₹30,000 (computed) as rent from a House Property, which had been transferred to him by Smt. Savita Rani without consideration a few years back. (iv) During the previous year she sold Government of India Capital Indexed Bonds for ₹1,54,950 on 30.09.2019, which she purchased for ₹80,000.The indexed cost of these bonds is 126582. (v) Her employer gave her an interest free loan of ₹1,50,000 on 01.10.2019 to one of her son’s wife for the purchase of an Alto Maruti Car. Nothing has been repaid to the company towards the loan. (vi) During the previous year 2019-2020 she paid ₹15,000 by cheque to GIC towards Medical Insurance Premium of her dependent mother. Compute the taxable income and tax liability of Mrs. Savita Rani for the A.Y. 2020-2021. Question-17 Ramesh retired as General manager of XYZ Co. Ltd. on 30.11.2019 after rendering service for 20 years and 10 months. He received ₹3,00,000 as gratuity from the employer. (He is not covered by Gratuity Act, 1972). His salary particulars are given below: Basic pay ₹10,000 per month up to 30.6.2019 Basic pay ₹12,000 per month from 1.7.2019 Dearness allowance (Eligible for retirement benefits) 50% of basic pay Transport allowance ₹1,500 per month He resides in his own house. Interest on monies borrowed for the self-occupied house is ₹24,000 for the year ended 31.03.2020. From a fixed deposit with a bank, he earned interest income of ₹18,000 for the year ended 31.03.2020. 82

Compute taxable income of Ramesh for the year ended 31.03.2020. Question-18 Shri Hari is the General Manager of ABC Ltd. From the following details compute the taxable income for the Assessment year 2020-21: Basic salary ₹20,000 per month Dearness allowance 30% of basic salary Transport allowance ₹2,000 per month Motor car running and maintenance charges fully paid by employer ₹36,000 (The motor car is owned and driven by employee Hari. The engine cubic capacity is below 1.6 litres. The motor car is used for both official and personal purpose by the employee) Expenditure on accommodation in hotels while touring on official duties met by the ₹30,000 employer. Loan from recognised provident fund (maintained by the employer) ₹40,000 Value of lunch provided by the employer during office hours - Cost to the ₹12,000 employer Residence telephone bill for Hari paid by the employer ₹15,000 Computer (cost ₹50,000) kept by the employer in the residence of Hari from 1.10.19 Hari made the following payments: Medical insurance premium - Paid in cash ₹2,000 - Paid by cheque ₹3,200 Question-19 Distinguish between foregoing of salary and surrender of salary. Question-20 Mr. X and Mr. Y are working for M/s. Gama Ltd. As per salary fixation norms, the following perquisites were offered: For Mr. X, who engaged a domestic servant for ₹500 per month, his employer reimbursed the entire salary paid to the domestic servant i.e. ₹500 per month. For Mr. Y, he was provided with a domestic servant @ ₹500 per month as part of remuneration package. You are required to comment on the taxability of the above in the hands of Mr. X and Mr. Y, who are not specified employees. 83

Question-21 Mr. Vignesh, Finance Manager of KLM Ltd., Mumbai, furnishes the following particulars for the financial year 2019-20. (i) Salary ₹46,000 per month (ii) Value of medical facility in a hospital maintained by the company ₹7,000 (iii) Rent free accommodation owned by the company (iv) Housing loan of ₹6,00,000 at the interest rate of 5% per annum (No repayment made during the year). (v) Gifts made by the company on the occasion of wedding anniversary of Mr. Vignesh ₹4,750. (vi) A wooden table and 4 chairs were provided to Mr. Vignesh at his residence (dining table).This was purchased on 1.5.14 for ₹60,000 and sold to Mr. Vignesh on 1.8.2019 for ₹30,000. (vii) Personal purchases through credit card provided by the company amounting to ₹10,000 was paid by the company. No part of the amount was recovered from Mr.Vignesh. (viii) An ambassador car which was purchased by the company on 16.7.14 for ₹2,50,000 was sold to the assessee on 14.7.19 for ₹80,000. Other income received by the assessee during the previous year 2019-20. Interest on Fixed Deposits with a company ₹ Income from specified mutual fund Interest on bank deposits of a minor married daughter 5,000 Income from UTI received by his handicapped minor son 3,000 Contribution to LIC towards premium u/s 80CCC 3,000 Deposit in PPF Account made during the year 2019-20 1,200 Bonds of ICICI (Tax savings) eligible for tax rebate 10,000 65,000 25,000 Compute the taxable income of Mr. Vignesh and the tax thereon for the Assessment year 2020-21. Question-23 Mrs. Lakshmi aged about 66 years is a Finance Manager of M/s. Lakshmi & Co., Pvt. Ltd., based at Calcutta. She is in continuous service since 1966 and receives the following salary and perks from the company during the year ending 31.03.2020. (i) Basic Salary (50,000 x 12) = ₹6,00,000 (ii) D.A. (20,000 x 12) = ₹2,40,000 (Part of Retirement Benefits) (iii) Bonus – 2 months basic pay. (iv) Commission – 0.1% of the turnover of the company. The turnover for the F.Y. 2019-20 was ₹15.00 crores. 84

(v) Contribution of the employer and employee to the PF Account ₹3,00,000 each. (vi) Interest credited to P.F. Account at 8.5% - ₹60,000. (vii) Rent free unfurnished accommodation provided by the company for which the company pays a rent of ₹70,000 per annum. (viii) Entertainment Allowance – ₹30,000. (ix) Children’s education allowance to meet the hostel expenditure of three children – ₹5,000 each. She makes the following payments and investments: (a) Premium paid to insure the life of her major son – ₹15,000. (b) Medical Insurance premium for self – ₹5,000; Spouse – ₹5,000. (c) Donation to a public charitable institution registered under 80G ₹2,00,000. (d) LIC Pension Fund – ₹12,000. Determine the tax liability for the Assessment Year 2020-21. 85

ANSWERS Answer-1 Computation of Total Income and tax liability of Mr. Yogesh for the Assessment year 2020-21 Particulars Amount ( ₹) Income from Salary Salary ( ₹10,000 × 9) 90,000 D.A. (10% of salary) 9,000 Club Bills reimbursed by employer 15,000 House Rent Allowance ( ₹13,500 – ₹12,600) (Note 1) 900 Transport allowance ( ₹1,400 × 9) i.e. ₹12,600 12,600 Pension ( ₹5,000 × 2 + ₹2,500 × 1) 12,500 Commuted pension ( ₹1,50,000 – ₹1,00,000) (Note 2) 50,000 Gratuity ( ₹2,50,000 – ₹1,54,000) (Note 3) 96,000 Employer’s contribution of U.R.P.F. 35,000 Interest on employers contribution to U.R.P.F 25,000 Gross salary 3,46,000 Less: Standard Deduction sec 16(ia) 50000 Income from Salary 2,96,000 Income from other sources Interest received on own contribution U.R.P.F 15,000 Gross total income 3,11,000 Less: Deduction u/s 80C (Note 4) 40,000 Total taxable income 2,71,000 Tax on ₹3,12,180 Income tax 1,050.00 Less: Rebate u/s 87A 1,050.00 Add: Health And Education cess @ 4% 0.00 0.00 Tax liability 0.00 Tax liability rounded off 0.00 86

Note: ₹ 1. HRA is exempt to the extent of the minimum of the following: 13,500 (i) HRA received ( ₹1,500 × 9) 12,600 (ii) Rent paid -10% of salary of ₹99,000 i.e. ( ₹22,500 – ₹9,900) 39,600 (iii) 40% of salary Therefore, ₹12,600 will be exempt. 2. Commuted pension will be exempt to the extent of commuted value of 1/3rd of the pension as the assessee is also entitled to gratuity. The exemption amount will be ( ₹1,50,000 × 2 × 1/3) = ₹1,00,000. 3. Assuming that he is not covered under the Payment of Gratuity Act. Gratuity is exempt to the extent of the minimum of the following: (i) Half month's average salary for every completed year of service i.e. (28 × 1/2 ₹ × ₹11,000) 1,54,000 (ii) Actual gratuity received 2,50,000 10,00,000 (iii) Specified amount Therefore, ₹1,54,000 will be exempt. ₹ 4. The following payments qualify for deduction u/s 80C: 5,000 (i) LlC premium 7,000 (ii) PPF 8,000 (iii) Jeevan Dhara Scheme 15,000 (iv) Repayment of housing loan 5,000 (v) Purchase of NSC IX issue 40,000 Answer-2 ₹ ₹ Computation of Income from Salary of Manas for Assessment year 2020-21 1,08,000 Particulars 27,000 Salary ( ₹12,000 × 9) 2,700 Dearness allowance ( ₹3,000 × 9) 4,500 City compensatory allowance ( ₹300 × 9) Entertainment allowance ( ₹500 × 9) 87

House rent allowance 36,000 1,800 Less: Exempt (Note 1) 34,200 Nil Gratuity (Note 2) 5,000 Pension for January 2018 5,000 Pension for February & March 2018 ( ₹2,500 × 2) 53,333 Commuted pension (Note 3) 2,07,333 Gross salary 50,000 Less Standard Deduction Section 16 (ia) 157333 Income from Salary Working note – 1. As per section 10(13A), house rent allowance will be exempt to the extent of minimum of the following three: (i) 50% of salary i.e. ₹54,000 (ii) Rent paid minus 10% of salary i.e. 5,000 – 1,200 = 3,800 × 9 = ₹34,200. (iii) HRA received ₹4,000 × 9 = ₹36,000 Therefore, ₹34,200 will be exempt. 2. Gratuity of ₹1,20,000 is fully exempt u/s 10(10) being the minimum of the following amounts: (i) ₹1,20,000 (ii) (12,000/2) × 24 = ₹1,44,000 (iii) ₹10,00,000 3. As Manas is receiving gratuity, commuted value of one-third of pension which he is normally entitled to receive will be exempt and the balance is taxable. 50% of the pension commuted is ₹1,60,000. Therefore, 100% would be ₹3,20,000 and 1/3rd would be ₹1,06,667. The balance of ₹53,333 is taxable. Answer-3 Manish is a resident but not ordinarily resident in India for the assessment year 2020-21. Income earned and received out of India is not chargeable to tax in India. Therefore, salary and perquisites received out of India for rendering service in New York is not deemed as income chargeable to tax in India u/s 9(1)(iii). For the assessment year 2020-21, taxable income of Manish will, therefore, be computed as follows: 88

Particulars ₹ Salary of 4 months of service in New York (not taxable) - Salary of 8 months of service in Delhi 2,20,000 Bonus of 2016-17 30,000 Employer’s contribution towards recognised provident fund in excess of 12% of salary [ 7,200 ₹4,000 x 12 – 12% of ( ₹1,20,000 + ₹2,20,000); salary of the entire previous year will be taken, as the provident fund is maintained in Delhi] 58,000 Free car facility in Delhi - Car allowance in New York(not chargeable as Manish is RNOR in India) 54,000 Rent free flat in Delhi (Note 1) - Rent free flat in New York(not chargeable as Manish is RNOR in India) - Sale of computer Pension from Gujarat Government ( ₹10,000 × 12] 1,20,000 Gross salary 4,89,200 Less: Deduction u/s 16 (ia) 50,000 Income from salary 4,39,200 Income from other sources 2,10,000 Gross total income 6,49,200 Less: Deduction u/s 80C (Note 5) 1,50,000 Total Income (rounded off) 4,99,200 Tax Income tax 22,340.00 Add: Education cess (2% of tax) 446.80 Add: Secondary and higher education cess [1% of tax] 223.40 Tax payable Tax payable (rounded off) 23,010.20 23,010.00 Notes: 1. Salary for the purpose of valuation of rent-free flat at Delhi comes to ₹3,00,000(i.e., ₹2,20,000 + pension of 8 months: ₹80,000). Lease rent of the flat is ₹1,12,000 (i.e., ₹14,000 x 8). As lease rent of the flat exceeds, 15% of salary, ₹45,000 (being 15% of salary) is taxable value of unfurnished flat. To this figure, rent of furniture is added to arrive at the valuation of furnished flat. Therefore, ₹54,000 (i.e., ₹45,000 + ₹9,000) is value of rent-free furnished flat provided in Delhi. 2. Salary, allowance or perquisite from UNO is not chargeable to tax. 3. Professional tax is deductible on payment basis. As professional tax is paid after the end of the previous year 2019-20, it is not deductible. 89

4. Perquisite in respect of sale of computer ₹ 62,000 Cost of computer to the employer 31,000 Less: Normal wear and tear for first year ending April 9, 2016 (50% of ₹62,000) 31,000 Balance as on April 10, 2016 15,500 Less: Normal wear & tear for second year ending April 9, 2017(50% of ₹31,000) 15,500 Balance as on April 10, 2017 16,500 Less: Sale price paid by Manish Balance Nil 5. Deduction u/s 80C Gross qualifying amount ₹ Contribution to recognised provident fund 65,000 19,000 Contribution to public provident fund 30,000 Payment of insurance premium to an American insurance company (subject to 48,000 maximum of 10% of sum assured) 26,000 Tuition fees of Manish's son ( ₹4,000 × 12) 1,88,000 1,50,000 Investment in equity shares of a notified company engaged in maintaining an 1,50,000 infrastructure facility Total Maximum permissible Deduction u/s 80C Answer-4 Excluding Including A. Tax payable for A.Y. 2020-21 arrears of arrears of salary ( ₹) salary ( ₹) Computation of tax 6,00,000 6,00,000 Current year salary chapter VI-A -u/s 80C – P.P.F. --- 15,000 6,00,000 6,15,000 Add: Arrears of salary 50,000 50,000 50,000 50,000 Gross Total income Less Standard Deduction 5,00,000 5,15,000 Less: Deduction under Contribution Total income 90

Income tax thereon 22,500 15,500 Less rebate u/s 87A 22500 NIL Add: Health & Education cess @ 4% Tax payable 0.00 620 0.00 16,120 B. Tax payable for A.Y. 2003-04 Computation of tax Excluding Including arrears of arrears of Current year income salary ( ₹) salary ( ₹) Add: Arrears of salary Total income 66,000 66,000 Income tax thereon Add: Surcharge @ 2% -- 15,000 Tax payable 66,000 81,000 C. Relief u/s. 89 Particulars 2,200 5,200 (i) Tax payable on arrears in A.Y. 2020-21: Tax on income including arrears 44 104 Less: Tax on income excluding arrears (ii) Tax payable on arrears in A.Y. 2003-04: 2,244 5,304 Tax on income including arrears Less: Tax on income excluding arrears ₹ ₹ Relief u/s. 89 (i.e. excess tax payable in A.Y.2003-04 for arrears) 16,120 16,120 D. Tax payable for A.Y. 2018-19 after relief u/s. 89 0.00 Particulars 3,060 Income tax payable on income including arrears 5,304 13,060 Less: Relief u/s. 89 as per workings (C) above 2,244 Tax payable ₹ 16,120 13,060 3,060 91

Answer-5 Computation of income under the head “Salaries” for the A.Y.2020-21 ₹ Particulars 1,35,000 Salary ( ₹15,000 × 9) 27,000 Dearness allowance ( ₹3,000 × 9) 3,600 City compensatory allowance ( ₹400 × 9) 13,500 Entertainment allowance ( ₹1,500 × 9) 9,000 House rent allowance [See Note 1] 16,000 Pension ( ₹8,000 + ₹4,000 × 2) 65,000 Commuted pension ( ₹1,95,000 – ₹1,30,000) [See Note 3] 2,69,100 Gross salary 50,000 Less Standard Deduction Less: Deduction u/s 16 [See Note 5] Nil Income from salary 2,19,100 Note: 1. As per section 10(13A), house rent allowance will be exempt to the extent of minimum of the following three amounts: (i) 50% of salary i.e. ₹67,500. (ii) Rent paid minus 10% of salary i.e., ₹5,500 – ₹1,500 = ₹4,000 × 9 = ₹36,000 (iii) HRA received ₹5,000 × 9 = ₹45,000 Therefore, out of ₹45,000, ₹36,000 will be exempt and the balance ₹9,000 will be included in Gross Salary. 2. Gratuity of ₹95,000 is fully exempt u/s 10(10)(iii), being the minimum of the following amounts: (i) Actual gratuity received, i.e., ₹95,000 (ii) Half month’s average salary for every completed year of service i.e. 15,000 × 16 /2 = 1,20,000 (iii) Notified limit i.e., ₹10,00,000 3. As Raman is receiving gratuity, one-third of commuted pension will be exempt and the balance would be taxable. 50% of the pension commuted is ₹1,95,000. Therefore, 100% would be ₹3,90,000 and one-third of the same would be ₹1,30,000. The taxable portion of the commuted pension would be ₹65,000 (i.e. ₹1,95,000 - ₹1,30,000). 4. Since employer’s contribution to recognized provident fund is less than 12% of salary, it is not taxable. Accumulated balance of the recognized provident fund received is exempt from tax, since Raman has rendered continuous service of more than five years. 5. Deduction u/s 16(ii) in respect of entertainment allowance can be claimed only by Government employees. Therefore, Raman is not eligible for any deduction in respect of entertainment allowance received by him. 92

Answer-6 Amount Amount Computation of Total Income of Ramesh for the Assessment Year 2020-21 ( ₹) ( ₹) Particulars 13,500 90,000 1,800 4,000 Basic salary 25,000 Bonus 2,76,000 Special allowance 1,96,154 11,700 House rent allowance 25,000 2,200 Less: Exempt (See Note 1) 11,905 Employer's contribution towards recognised provident fund in excess of 79,846 12% of salary (i.e., ₹13,000 -12% of ₹90,000) 1,440 Gratuity Less: Exempt (See Note 2) 13,095 Uncommuted pension [ ₹900 + (30% of ₹900 x 2)] 5,000 Commuted pension 18,500 Less: Exempt (See Note 3) 2,50,781 Free use of deluxe bus by Ramesh and family members 1,500 Tour expenses of Mrs. X 50,000 Gross salary 1,99,281 Less: Deduction u/s 16(iii) - Professional tax 1,99,281 Less : Standard Deduction U/S 16(ia) 30,000 Income from salary 1,69,281 Gross total income 1,69,280 Less: Deduction u/s 80C (See Note 5) Total income Amount Total income (rounded off) ( ₹) 1,500 Notes: 200 1. HRA is exempt to the extent of least of the following: 4,000 Particulars (i) Actual HRA received (ii) Rent paid – 10% of salary ( ₹1,200 – 10% × ₹10,000) (iii) 40% of salary (40% of ₹10,000) Therefore, ₹1,800 ( ₹200 x 9), being the least amount, is exempt u/s10(13A). 93

2. Ramesh is a private sector employee, covered by the Payment of Gratuity Act. Number of completed years of service is 34 years. Gratuity is exempt to the extent of minimum of the following: Particulars Amount ( ₹) (i) Statutory limit (ii) 15 days’ salary for every completed year of service ( ₹10,000×34×15/26) 10,00,000 (iii) Actual gratuity received 1,96,154 2,76,000 Therefore, ₹1,96,154 is exempt u/s 10(10). 3. Commuted pension is exempt from tax as under: Commuted value of 70% of usual pension: ₹25,000 Commuted value of full pension: ₹35,714 (i.e., ₹25,000 / 0.7) Amount exempt from tax is one-third of commuted value of full pension, i.e., 1/3 of ₹35,714 = ₹11,905, as Ramesh is in receipt of gratuity at the time of retirement. 4. Accumulated balance of recognised provident fund is exempt from tax as Ramesh has rendered continuous service of more than 5 years with his employer. 5. Deduction u/s 80C: Amount Particulars ( ₹) Contribution towards recognised provident fund 15,000 Insurance premium 15,000 Total deduction 30,000 Answer-7 Amount Amount Computation of Total Income of Ramesh for the A.Y. 2020-21 ( ₹) ( ₹) Particulars 45,000 1,80,000 32,400 72,000 Basic Salary ( ₹20,000 × 9) Dearness Allowance ( ₹1,80,000 × 40%) 12,600 House Rent Allowance ( ₹5,000 × 9) 10,800 Less: Exempt u/s 10(13A) (Note 1) 24,300 Medical allowance ( ₹1,200 × 9) Value of car (1800+900 × 9) 94

Gas / electricity ( ₹800 × 9) 2,40,000 7,200 Education Re-imbursement ( ₹450 × 9) 2,40,000 4,050 Watchman ( ₹600 × 9) 1,25,000 5,400 Sweeper ( ₹600 × 9) 1,25,000 5,400 Cook ( ₹600 × 9) 5,400 Interest on loan (Note 2) 43,200 Nil Gratuity 20,000 Less: Exempt u/s 10(10) (Note 3) 15,000 Nil Leave salary 10,000 Less: Exempt u/s 10(10AA) (Note 4) Nil Income from Salary 3,27,150 Less Deduction U/s 16(ia) 50,000 Gross total income 2,77,150 Less: Deduction u/s 80C 88,200 PF (Note 5) 1,88,950 NSC PPF Amount LIP ( ₹) Total Income 45,000 Notes: 32,400 1. HRA is exempt to the extent of least of the following: 1,08,000 Particulars Amount ( ₹) (i) Actual HRA received (ii) Rent paid – 10% of Salary ( ₹54,000 – 10% × ( ₹1,80,000 + ₹36,000) 10,00,000 (iii) 50% of Salary [50% of ( ₹1,80,000+ ₹36,000) Therefore, ₹32,400, being the least amount, is exempt u/s 10(13A). 2. Interest on loan is not taxable as interest charged is more than the rate of SBI. 3. Gratuity is exempt to the extent of minimum of the following: Particulars (i) Statutory limit 95

(ii) Half month’s salary for every year of service (½ x 30 x ₹24,000) 3,60,000 (iii) Actual gratuity received 2,40,000 Therefore, ₹2,40,000 is exempt u/s 10(10). It is assumed that the employee is not covered under The Payment of Gratuity Act, 1972. 4. Leave encashment is exempt to the extent of minimum of the following: Particulars Amount ( ₹) (i) Statutory limit (ii) Cash equivalent of leave at the credit of the employee(12 × ₹24,000) 3,00,000 (iii) 10 months average salary (10 x ₹24,000) 2,88,000 (iv) Actual amount received 2,40,000 1,25,000 Therefore, ₹1,25,000 is exempt u/s 10(10AA). 5. Employee’s Contribution to RPF = 20% of (BS + DA for retirement benefits) = 20% of ( ₹1,80,000 + ₹36,000) = 20% of ₹2,16,000 = ₹43,200 Answer-8 Computation of taxable income and tax liability of Mr. Jaideep for the A.Y. 2020-21 Particulars ₹ ₹ Basic salary 1,90,000 Dearness allowance 2,340 12,300 City compensatory allowance 1,560 Education allowance: 16,200 3,100 Less: Exempt [see Note 3] 270 House rent allowance 780 Less: Exempt [see Note 1] Reimbursement of medical expenditure (i.e., ₹21,233 – ₹15,000) 15,930 Reimbursement of expenditure on books and journals for official work 6,233 (not chargeable to tax) Nil Gross salary Less: Deductions u/s 16 (ia) 2,28,343 Net salary 50,000 Income from other sources (i.e. ₹90,000 – ₹3,400) 1,78,343 Gross total income 86,600 Less: Deduction u/s 80C [see Note 4] 2,64,943 32,253 96

Total income 2,28,043 Tax on total income Income-tax NIL Less: Rebate u/s 87A NIL nil Add: H&EC @4% nil Tax payable nil Tax payable (rounded off) nil Notes: 1. House rent allowance is exempt from tax to the extent of the least of the following: (a) ₹80,920 (being 40% of ₹2,02,300); (b) ₹16,200 (being the amount of house rent allowance); (c) ₹270 [being the excess of rent paid over 10% of salary, i.e., ₹20,500 – 10% of( ₹1,90,000 + ₹12,300)] 2. Expenditure on books and maintenance of car is application of income and is not deductible. 3. Education allowance for children is not chargeable to tax up to ₹100 per child per month for a maximum of 2 children. Therefore, in this case, the amount not chargeable to tax is ₹65 per month for 2 children, i.e., ₹1,560. 4. Deduction u/s 80C is computed as under: Contribution to statutory provident fund [i.e., 11% of ( ₹1,90,000 + ₹12,300)] ₹22,253 Insurance premium (maximum: 20% of sum assured i.e. 20% of 50,000) ₹10,000 Total deduction ₹32,253 Answer-9 False - The membership fee payable to the Institute is an obligation of Mr. S, which is paid by his employer i.e. T Ltd.Under the definition of perquisite, an obligation of the employee paid by the employer is to be treated as a perquisite and hence chargeable to tax. Answer-10 Perquisite value for housing loan The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan made available to the employee or any member of his household during the relevant previous year by the employer or any person on his behalf shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India(SBI) as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it. This rate should be applied on the maximum outstanding monthly balance and the resulting amount should be reduced by the interest, if any, actually paid by him. 97

“Maximum outstanding monthly balance” means the aggregate outstanding balance for loan as on the last day of each month. The perquisite value for computation is 10% - 6% = 4% Month Maximum outstanding balance as Perquisite value at 4% for the on last date of month month April 5,88,000 1,960 May 5,76,000 1,920 June 5,64,000 1,880 July 5,52,000 1,840 August 5,40,000 1,800 September 5,28,000 1,760 October 5,16,000 1,720 November 5,04,000 1,680 December 4,92,000 1,640 January 4,80,000 1,600 February 4,68,000 1,560 March 4,56,000 1,520 Total value of this perquisite 20,880 Perquisite Value of Air Conditioners ₹ Original cost Depreciation on SLM basis for 4 years @10% i.e. ₹2,00,000 × 10% × 4 2,00,000 Written down value 80,000 Amount recovered from the employee 1,20,000 Perquisite value 90,000 30,000 Chargeable perquisite in the hands of Mr. Badri for the assessment year ₹ Housing loan 20,880 Air Conditioner 30,000 Total 50,880 Answer-11 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 98

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(1) provides for relief in these types of cases. Loan or Advance against Salary Loan is different from salary. When an employee takes a loan from his employer, which is repayable in certain specified instalments, 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 against his salary over a specified time period. It cannot be taxed as salary. Answer-12 Amount Amount Computation of taxable salary of Mr. M. for the Assessment Year 2020-21 ( ₹) ( ₹) Particulars 24,000 2,75,000 24000 Basic Salary ( ₹20,000 ×5) +( ₹25,000 × 7) 6,000 Transport allowance ( ₹2,000 × 12) 2,400 3,600 (earlier we get benefit of transport allowance upto 1600*12=19200) 3,600 Children education allowance ( ₹500 × 12) 4,560 Less: Exempt u/s 10(14) ( ₹100 × 2 × 12) 4,560 Nil City Compensatory Allowance ( ₹300 × 12) 5,000 Hostel Expenses Allowance ( ₹380 × 12) 2,500 Less: Exempt u/s 10(14) ( ₹300 × 2 × 12 i.e. ₹7,200 but restricted to the 8,250 actual allowance of ₹4,560) Tiffin allowance (fully taxable) 3,21,950 Tax paid on employment 2,500 Employer’s contribution to R.P.F in excess of 12% of salary 50,000 (i.e. 3% of ₹2,75,000) Gross Salary 2,69,450 Less: Tax on employment u/s 16(iii) Less: Standard Deduction U/S 16(ia) Taxable salary Notes: (i) The question states that contribution to recognised provident fund is at 15% of Basic salary + D.A. However, since neither the amount nor rate of D.A. has been given in the question, contribution to recognised provident fund has been taken as15% of basic salary. 99

(ii) Professional tax paid by employer should be included in the salary of Mr. M as a perquisite since it is discharge of monetary obligation of the employee by the employer. Thereafter, deduction of professional tax paid is allowed to the employee from his gross salary. Answer-13 Computation of Relief u/s 89 for the Assessment Year 2018-19 Particulars Nil ₹₹ Salary Income for the year excluding the arrears 5% 5,25,000 Add: Arrears relating to Financial Year 2007-08 20% 40,000 Total Income 5,65,000 Assessment year 2020-21 Tax on ₹5,65,000 0 First ₹2,50,000 12,500 Next ₹2,50,000 13,000 Balance ₹65,000 25,500 1,020 Add: health & Education cess @ 4% Tax on total income (including arrears) (A) 26,520 Total Income excluding arrears 5,25,000 Tax on ₹5,25,000 Nil 0 First ₹2,50,000 5% 12,500 Next ₹2,50,000 20% 5,000 Balance ₹25,000 17,500 Add: Health & Education cess @ 4% 700 Tax on total income (excluding arrears) (B) 18,200 Difference between A & B I 8,320 Assessment Year 2008-09 1,40,000 Total Income assessed 40,000 Add: Arrears relating to Financial year 2007-08 1,80,000 Total income (including arrears) 11,000 Tax on ₹1,80,000 100