Tax

1.4.4. Tax Incidence for Different Taxpayers ROR (Individual/HUF) RNOR NR Resident (Any Other (Only in Case of Individual/HUF) Assessee) income received in India income which accrues or arises or is deemed to be accrue or arise in India income which accrues or income which accrues or arises outside India --- arises outside India derived from a business controlled in or profession set up in India Illustration Compute the total income in the hands of an individual, being a resident and ordinarily resident, resident but not ordinarily resident, and non-resident for the A.Y. Particulars Amount (₹) Interest on UK Development Bonds, 50% of interest received in India Income from a business in Chennai (50% is received in India) 10,000 Profits on sale of shares of an Indian company received in London 20,000 Dividend from British company received in London 20,000 Profits on sale of plant at Germany 50% of profits are received in India 5,000 Income earned from business in Germany which is controlled from 40,000 Delhi(₹40,000 is received in India) 70,000 Profits from a business in Delhi but managed entirely from London Income from house property in London deposited in a Indian Bank at 15,000 London, brought to India (Computed) 50,000 Interest on debentures in an Indian company received in London. Fees for technical services rendered in India but received in London 12,000 Profits from a business in Bombay managed from London 8,000 Pension for services rendered in India but received in Burma 26,000 Income from property situated in Pakistan received there 4,000 Past foreign untaxed income brought to India during the previous year 16,000 Income from agricultural land in Nepal received there and then brought 5,000 to India 18,000 Income from profession in Kenya which was set up in India, received 5,000 40

there but spent in India 20,000 Gift received on the occasion of his wedding 12,000 Interest on savings bank deposit in State Bank of India 20,000 Income from a business in Russia, controlled from Russia 5,000 Dividend from Reliance Petroleum Limited, an Indian Company 15,000 Agricultural income from a land in Rajasthan NR Solution: 5,000 20,000 Computation of total income for the A.Y. 20,000 Particulars ROR RNOR - 10,000 5,000 20,000 Interest on UK Development Bonds, 50% of 20,000 20,000 40,000 interest received in India 20,000 20,000 15,000 Income from a business in Chennai (50% is 5,000 - - received in India) 40,000 20,000 70,000 70,000 12,000 Profits on sale of shares of an Indian company 8,000 received in London (assuming that they are in the 15,000 15,000 26,000 nature of short-term capital gains) 50,000 - 4,000 12,000 Dividend from British company received in 8,000 12,000 London 26,000 8,000 4,000 26,000 Profits on sale of plant at Germany, 50% of profits 4,000 are received in India Income earned from business in Germany which is controlled from Delhi, out of which ₹40,000 is received in India Profits from a business in Delhi but managed entirely from London Income from property in London deposited in a Bank at London, later on remitted to India Interest on debentures in an Indian company received in London. Fees for technical services rendered in India but received in London Profits from a business in Bombay managed from London Pension for services rendered in India but received 41

in Burma 16,000 - - - - - Income from property situated in Pakistan - - received there 18,000 5,000 - 5,000 - - Past foreign untaxed income brought to India 12,000 12,000 during the previous year - - - 12,000 - - Income from agricultural land in Nepal received 20,000 - - there and then brought to India 2,17,000 1,82,000 - 10,000 10,000 Income from profession in Kenya which was set - up in India, received there but spent in India 3,51,000 2,07,000 1,72,000 10,000 Gift received on the occasion of his wedding [nontaxable] 3,41,000 Interest on savings bank deposit in State Bank of India Income from a business in Russia, controlled from Russia Dividend from Reliance Petroleum Limited, an Indian Company [Exempt under section 10(34)] Agricultural income from a land in Rajasthan[Exempt under section 10(1)] Gross Total Income Less: Deduction under section 80TTA[Interest on savings bank account subject to a maximum of ₹10,000] Total Income 42

SECTION-II PERSONAL TAXATION AND BUSINESS TAXATION- andCOMPUTATION TAX EFFICIENCY SUB-SECTIONS 2.1 Salary Income 2.2 Income from House Property 2.3 Income from Business or Profession 2.4 Capital Gains in Transfer of Capital Assets 2.5 Income from Residency Sources and Tax Calculation Rules 2.6 Tax Characteristics of Business Forms 43

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Sub-Section 2.1 Income u/h Salaries Learning Objectives: After reading this unit, you will be able to understand:  when the salary income is chargeable to tax  the concept of profits in lieu of salary  the various retirement benefits which will be charged as salary  the concepts of allowances and perquisites  the admissible deductions from salary 2.1.0. General Employer-employee Relationship: Before an income can become chargeable u/h ‗salaries‘, it is vital that there should exist between the payer and the payee, the relationship of an employer and an employee. (a) Commission received by a Director from a company is salary if the Director is an employee of the company. If, however, the Director is not an employee of the company, the said commission cannot be charged as salary but has to be charged either as income from business or as income from other sources depending upon the facts. (b) Salary paid to a partner by a firm is nothing but an appropriation of profits. Any salary, bonus, commission or remuneration by whatever name called due to or received by partner of a firm shall not be regarded as salary. The same is to be charged as income from profits and gains of business or profession. This is primarily because the relationship between the firm and its partners is not that of an employer and employee. Illustration-1 A lecturer is an employee of college and income from college is his Salary Income. But if he sets question paper for the university and receives remuneration for the same, then the income from setting of the question papers is not taxable under the head ‗Salary‘ but under the head ‗Other Sources‘. This is because he is not an employee of the university. Thus income from college is his Salary Income but income from university is his income from Other Sources. 45

Illustration-2 A Member of Parliament is not a government employee and therefore remuneration received by him is not taxable under the head of ‗Salary‘, rather it shall be taxed under the head ‗Other Sources‘. Illustration-3 Salary income earned by the partner of a firm, from the firm shall not be treated as salary but as an income of business and profession. This is because partners do not have the relationship of employer-employee but have relationship of principal and agent amongst themselves. Full-time or Part-time Employment: It does not matter whether the employee is a fulltime employee or a part-time one. If an employee works with more than one employer, salaries received from all the employers shall be chargeable u/h Salaries. Foregoing of Salary: Once salary accrues, the subsequent waiver by the employee does not absolve him from liability to income-tax. Such waiver is only an application and hence, chargeable to tax. Illustration-4 Mr. A, an employee instructs his employer that he is not interested in receiving the salary for April and the same might be donated to a charitable institution. In this case, Mr. A cannot claim that he cannot be charged in respect of the salary for April. It is only due to his instruction that the donation was made to a charitable institution by his employer. It is only an application of income. Hence, the salary for the month of April will be taxable in the hands of Mr. A. He is however, entitled to claim a deduction u/s 80G for the amount donated to the institution. Surrender of Salary: However, if an employee surrenders his salary to the Central Government u/s 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered would be exempt while computing his taxable income. Salary Paid Tax-free: This, in other words, means that the employer bears the burden of the tax on the salary of the employee. In such a case, the income from salaries in the hands of the employee will consist of his salary income and also the tax on this salary paid by the employer. But taxes on non-monetary perquisites borne by the employer shall be exempt in the hands of employee. Further same is not allowed as an expense to the employer. (Section 10(10CC) & Section 36). 46

2.1.1. Gross Salary Income Basis of Charge – Section 15 Salary is chargeable to tax either on ‗due‘ basis or on ‗receipt‘ basis, whichever is earlier. However, where any salary, paid in advance, is assessed in the year of payment, it cannot be subsequently brought to tax in the year in which it becomes due. If the salary has already been assessed on due basis, the same cannot be taxed again when it is paid. Illustration-5 Mr. J is working in ABC Ltd. getting salary income of ₹20,000 pm. For the month of March, he gets salary on 10th April. Now, for the AY, his total Salary income taxable shall be ₹2,40,000 even though he has received ₹2,20,000. Salary of ₹20,000 is not received but still it would be taxable on the due basis. Basic Pay/Basic Salary All employees are given Basic Salary which is paid to an employee for his/her basic qualities such as educational qualification, work experience, expertise in a particular field, nature of job, etc. Basic Salary is always given in the form of pay scale or grade and is fully taxable. Under the graded system, the annual increment is fixed well in advance in a grade and is paid at the completion of every year of service (from the date of joining). Illustration-6 Mr. P joins services of XYZ Ltd. on 1/6/2009 in grade of15,500-300-17,900-500- 22,900.This means that he will get ₹15,500 pm in the first year of the job, i.e., from 1/6/2009 to 31/5/2010. Then, he will get increment of ₹300 pa every year till his salary becomes ₹17,900 pm. Afterwards, he will get increment of ₹500 pa till he gets the salary of ₹22,900 pm. After that, either he will be promoted to next grade or his salary will stop at ₹22,900 pm. Dearness Allowance Employees are given, along with the Basic Salary, an additional amount which is called Dearness Allowance (DA). This is given to an employee to compensate him for the increased cost of living. It is linked with the Consumer Price Index, which is revised on half yearly basis. DA is paid to employee on the basis of certain percentage of the Basic Salary and is always fully taxable just like Basic Salary. 47

Bonus This is a statutory payment made by the employer to the employee on the basis of profits or on the basis of production/productivity and for matters connected therewith. This amount is fully chargeable to tax on receipt basis. Commission Any extra payment made to the employee for the extra work done by him is called commission/fees, which are also fully chargeable to tax. Allowances Employees are given various allowances during the year. Some of them are given for the official work and some for personal purposes. These Allowances are either fully exempt /taxable or fully taxable, or partially taxable depending upon the nature of allowance. Perquisites Employees are provided with various facilities during the year. Some of them are given for the official work and some for the personal purposes. For all such facilities, a money value of such facilities has to be calculated which shall be known as perquisite value (PV). These perquisites are either fully exempt or fully taxable or partially taxable depending upon the nature of perquisites. Retirement Payments When employee gets retired from the job, then he is given various payments such as Provident Fund, Gratuity, Leave Encashment and Pension. Aggregate of all the above mentioned Incomes after exemptions would be known as „Gross Salary‟. From the Gross Salary, we will give the deductions of Section 16 to get „Income under head Salaries‟ which is also known as „Taxable Salary‟ or „Income from salary‟. 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 with his salary over a specified time period. It cannot be taxed as salary. Arrears of Salary Normally speaking, salary arrears must be charged on due basis. However, there are circumstances when it may not be possible to bring the same to charge on due basis. For example if the Pay Commission is appointed by the Central Government and it 48

recommends revision of salaries of employees, the arrears received in that connection will be charged on receipt basis. Here, relief u/s 89(1) is available. 2.1.2. Allowances Fully Taxable Partly Taxable (i) Entertainment Allowance (i) House Rent Allowance [u/s 10(13A)] (ii) Dearness Allowance (ii) Special Allowances [u/s 10(14)] (iii) Overtime Allowance (iv) Fixed Medical Allowance (v) City Compensatory Allowance (vi) Interim Allowance (to meet increased cost of living in cities) (vii) Servant Allowance (viii) Project Allowance (ix) Tiffin/Lunch/Dinner Allowance (x) Any other cash allowance (xi) Warden Allowance (xii) Non-practicing Allowance City Compensatory Allowance City Compensatory Allowance is provided to compensate the employees for the higher cost of living in cities. Entertainment Allowance: This allowance is given to employees to meet the expenses towards hospitality in receiving customers etc. The Act gives a deduction towards entertainment allowance only to a Government employee. House Rent Allowance – Section 10(13A) HRA granted to an employee is exempt to the extent of least of the following: Metro Cities (i.e. Delhi, Kolkata, Other Cities Mumbai, Chennai) 1) HRA actually received. 1) HRA actually received 2) Rent paid - 10% of salary for the 2) Rent paid - 10% of salary for the relevant period relevant period 3) 50% of salary for the relevant period 3) 40% of salary for the relevant period 49

Notes: 1. Exemption is not available to an assessee who lives in his own house, or in a house for which he has not incurred the expenditure of rent. 2. Salary for this purpose means basic salary, dearness allowance, if provided in terms of employment and commission as a fixed percentage of turnover. 3. Relevant period means the period for which the calculations are being made. 4. In case any of the factor changes on which calculations are dependent, then separate calculations shall be made for the period before and after such change. Illustration-7 Mr. S. Khan received the following during PY from the employer Basic Salary ₹10,000pm DA (70% forming part of retirement benefits) ₹2,000pm Commission ₹5,000pa HRA ₹1,200pm Calculate the taxable part of HRA assuming he paid ₹1900pm as rent in Chandigarh. Solution: Taxable HRA = (14400 – 9120) = 5280 (a) 14,400 (b) (1,900 x 12) – [10% of (10,000 x 12 + 2,000 x 70% x 12)] = 9,120 [Least] (c) 40% of (10,000 x 12 + 2,000 x 70% x 12) = 54,720 Illustration-8 Re-compute taxable part of HRA in question above assuming that till 31st October he stayed in his own residence in Mumbai and thereafter taken house on rent in Chandigarh @ 1900pm. Solution: Taxable HRA = (14400 – 3800) = 10600 First 7 months – fully taxable Next 5 months – 9,120 x 5 /12 = 3,800 [Exempt] Illustration-9 Mr. A. Khan received the following during PY from the employer Apr-Dec Jan-Mar Basic Salary 5,000pm 6,000pm DA (100% forming part of retirement benefits) 20% of basic salary Commission (based upon fixed percentage of - 3,000 for turnover) 3months HRA 1,100pm 1,100pm 50

He paid rent @ 800pm in Delhi throughout the year. Determine the taxable HRA. Solution: Taxable HRA = (13200 – 1800) = 11400 First 9 months (a) 9,900 (b) 800 x 9 – 10% of (5,000 x 9 + 1,000 x 9) = 1,800 [Exempt] (c) 50% of (5,000 x 9 + 1,000 x 9) = 27,000 Next 3 months (a) 3,300 (b) 800 x 3 – 10% of (6,000 x 3 + 1,200 x 3 + 3,000) = -60 = Nil [Exempt] (c) 50% of (6,000 x 3 + 1,200 x 3 + 3,000) = 12,300 Special Allowances – Section 10(14A) Following allowances shall be exempt to the extent amount utilised by the employee: Name of Allowance Purpose of Allowance (a) Travelling allowance granted to meet the cost of travel on tour/transfer (b) Daily allowance granted on tour/transfer, to meet the ordinary daily charges (c) Conveyance granted to meet the expenditure incurred on conveyance allowance in performance of duties of an office (d) Helper allowance granted to meet the expenditure incurred on a helper engaged for the performance of the duties of an office (e) Academic/Research granted for encouraging the academic, research and allowance training pursuits in educational and research institutions (f) Uniform allowance granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office Following allowances shall be exempt to the limit specified below. Actual amount spent is irrelevant. Name of Allowance Extent to Which Allowance is Exempt (a) Any allowance granted to an employee working in Lower of 70% of such any transport system to meet his personal allowance or ₹10,000pm expenditure during his duty performed in the course of running of such transport from one place to 51

another place (b) Children Education Allowance ₹100pm/child up to a maximum of 2 children. (c) Hostel Expenditure Allowance ₹300pm/child up to a maximum of 2 children. (d) Transport allowance to meet his expenditure for the ₹1600 per month. purpose of commuting between the place of his residence and the place of his duty (e) Transport allowance granted to an employee, who is ₹3200 per month. blind or handicapped, to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty (f) Underground Allowance: Such an Allowance is paid ₹800 per month to the employee working in mines or any other uncongenial unnatural climate conditions which are underground (g) Tribal Area Allowance: This Allowance is given to ₹200 per month employee to meet the additional cost that he will have to incur while he is posted to any tribal area. This Allowance is given in States of Madhya Pradesh, Uttar Pradesh, Tamil Nadu, Karnataka, Tripura, Assam, West Bengal, Orissa, and Bihar. (h) Border Area Allowance: This Allowance is given to depends upon the area of the men of armed forces who have been posted to the posting border areas (i) Counter Insurgency Allowance: This Allowance is ₹3,900 per month granted to the members of armed forces operating in any areaway from the permanent locations for a period of more than 30 days. If this Allowance is received by employee, then he shall not be entitled to Border Area Allowance. (j) Hill Compensatory Allowance: This Allowance is exempt up to ₹300 per month provided the place is located at a height of 1,000 meters or more above the sea level. However, in certain specified areas, the exempt amount is ₹800 per month (depending upon the height of the area from the sea level) and in the Siachen area of Jammu and Kashmir amount exempt is ₹7,000 per month. 52

Note: Names of allowances are for reference only. Taxability will purely depend on nature of allowance. 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 Owned by employer Population of the city Value of perquisite ≤ 10 lacs 7.5% of salary > 10 lacs ≤ 25 lacs 10% of salary > 25 lacs 15% of salary 53

Taken on rent by the Lower of: Actual rent & 15% of salary employer Lower of: Actual hotel charges & 24% of salary Accommodation in hotel 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 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 2018-19. Basic Salary ₹60,000pm DA (20% is for retirement benefits) ₹8,000pm Lunch Allowance ₹300pm 54

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 2017 to Mar 2018). (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 alongwith 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 ≤ 1.6ltrs. cc chauffer ₹2,400pm for car > ₹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 55

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. 56

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 01/05/2017. Loan further taken of ₹3,00,000 on 17/07/2017. Repayment made of ₹1,00,000 on 30/12/2017. Interest charged by SBI for similar loan equals to 12%pa as on 01.04.2017 and 13%pa as on 01/05/2017 and 14%pa as on 01.04.2018. Compute value of interest free loan for AY 2018-19 and AY 2019-20 assuming 4%pa recovered from employee as interest. Solution: AY 2018-19 = (2,00,000 x 2 + 5,00,000 x 5 + 4,00,000 x 4) x (12% - 4%) x 1/12 = 30,000 AY 2019-20 = 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 01/04/2017. Received ₹2,00,000 from insurance company on this account on 01/07/2017. Repaid ₹50,000 on 01/08/2017 to employer. No other repayment was made during the PY 2017-18. 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. 01/08/2016. Same was purchased by employer in year 1987 for ₹18,000. WDV in the books of employer as on 01/04/2016 was ₹2,000 and FMV on that date was ₹1,200. Calculate the taxable value of perquisite for AY 2017-18 & AY 2018-19 assuming he is still in possession of the same. Solution: AY 2017-18 = 18,000 x 10% x 8/12 = 1,200 AY 2018-19 = 18,000 x 10% = 1,800 (7) Transfer of Movable Assets 57

Nature of Asset Value of Perquisite Computers & Depreciated value @ 50% WDV for each completed year of usage electronic 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. Illustration-14 Compute the taxable value of perquisite for AY 2018-19 on the basis of following information: Asset Date of Purchase Cost Date of Sale Sale Price Computer June 15, 2015 40,000 August 3, 2017 4,000 Nov. 10, 2012 4,00,000 Sept. 14, 2017 55,000 Car Jan. 13, 2016 15,000 8,000 Washing Machine Feb 14, 2018 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 (8) Medical Facilities in India Fully exempt Partially exempt  Any medical treatment in following hospitals: Aggregate of (a) Hospital maintained by employer, Government or reimbursement by local authority employer of medical treatment expenses (b) Hospital approved by Government for its employees incurred by (c) Hospital approved by CCIT for specified diseases employee shall be  Health/medical insurance premium paid by employer exempt upto (under an approved scheme) ₹15,000pa. Balance shall be taxable.  Reimbursement of health/medical insurance premium paid by employee 58

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. (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. 59

(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 servants attendant  actual cost to the employer 2. Supply of gas, electric  Resources owned by the employer – energy or water manufacturing cost  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 5. Credit Card for  Membership fees & annual fees incurred by personal purposes employer 6. Club/sports/health  Actual cost to the employer (including annual or facilities periodical 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 60

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 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). 61

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 2017-18. (ii) He receives pension @ 900pm from CG during PY 2017-18. (iii) He left job of M/s ABC & associates on May 31, 2017 and thereafter received pension @ 1,000pm. (iv) He left job of Rajasthan Govt. on June 30, 2017. He was entitled to pension @ 2,000pm. On 01/01/2018 he got 40% of pension commuted for ₹50,000. 62

(v) He left job of XYZ Co. on July 31, 2017 and was entitled to pension @ 3,000pm. On 01/12/2017 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. 63

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 11/10/2017 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. 01/04/17) 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 15-01-2018 after rendering services for 30 years 7 months. His salary is ₹25,000/- p.m. upto 30-09-17 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. Solution: Computation of gratuity taxable in the hands of Mr. Shah for the AY 2018-19 64

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 65

(a) 3,00,000 (b) 70,000 (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, 2017. 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, 2017), DA 30% of basic salary (40% forming part of retirement benefits), commission 2% of turnover (Turnover ₹9,00,000 for PY 2017-18 and ₹6,00,000 for PY 2016-17). 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 66

(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 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. 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: 67

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 (5) Provident Fund Particulars Recognized PF Unrecognized Statutory PF Public PF PF Fully exempt N.A. Employer‘s Amount in Contribution excess of 12% Not taxable Eligible for Eligible for yearly deduction u/s deduction u/s Employee‘s of salary is Contribution taxable Not eligible for 80C 80C deduction Fully exempt Fully exempt Interest Eligible for Credited deduction u/s Not taxable Fully exempt Fully exempt yearly u/s 10(11) u/s 10(11) Amount 80C received on See Note (2) retirement, etc. Amount in excess of 9.5% p.a. is taxable u/h salaries See Note (1) 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. 68

Illustration-22 Compute income u/h salaries from the following information for PY 2017-18: Basic salary 5,000pm (6,000pm w.e.f. 01/09/17) 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 Solution: 13,000 ₹ 11,417 67,000 Particulars 46,900 Basic Salary (5,000 x 5 + 6,000 x 7) 3,500 DA (70% of 67,000) 2,375 1,583 Employer‘s contribution to RPF 1,125 Less: Exempt [(67,000 + 60% of 46,900) x 12%] 1,16,608 Interest credited to RPF Less: Exempt (3,500 x 9.5% / 14%) (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. 69

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. 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. 70

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 15/3/2018, he has paid this amount for current year as well as for the next year in advance. Calculate his taxable salary for the AY 2018-2019, i.e., PY 2017-2018. Solution: ₹ Calculation of Taxable Salary for the AY 2018-2019, i.e., PY 2017-2018 96,000 Particulars 24,000 96,000 Basic Salary (8,000 x 12) 2,16,000 Entertainment Allowance (2,000 x 12) 5,000 DA (100% of Basic Salary) 2,400 Gross Salary 2,08,600 Less: 16 (ii) Entertainment Allowance (Working Note) Less: 16 (iii) Professional Tax paid (100 x 12 x 2) Taxable Salary Calculation of deduction of Entertainment Allowance ₹ Particulars 24,000 Deduction is least of 19,200 Actual amount received 20% of salary , i.e., 20% of ₹96,000 5,000 Maximum limit of Professional Tax 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. 71

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 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, assessee need not apply for relief. In the case of Mr. Hari, aged 63 years, you are informed that the salary for the previous year 2017-18 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 72

Compute the relief available u/s 89 and the tax payable for the A.Y. 2018-19. Note: Rates of Taxes: Assessment Slab Rates of Income-Tax Year For resident individuals of the age of For other resident individuals 60 years or more at any time during the previous year Slabs Rate Slabs Rate 2011-12 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% 2012-13 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% 2013-14 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% 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 2017-18 Particulars Incl. Arrears of Excl. Arrears of Salary Salary Current year salary 10,20,000 10,20,000 Add: Arrears of salary 3,45,000 – Taxable Salary 13,65,000 10,20,000 Income-tax thereon 2,19,500 1,16,000 Add: EC @ 2% plus SHEC @ 1% 6,585 3,480 Total Payable 2,26,085 1,19,480 Computation of tax payable on arrears of salary if charged to tax in the respective assessment years. 73

AY 2011-12 AY 2012-13 AY 2013-14 Particulars Incl. Excl. Incl. Excl. Incl. Excl. arrears arrears Taxable salary arrears arrears arrears arrears Add: Arrears ofsalary 7,10,000 7,10,000 8,25,000 8,25,000 9,50,000 9,50,000 Taxable salary Tax on the above 1,03,000 — 1,17,000 — 1,25,000 — Add: Cess @ 3% Tax payable 8,13,000 7,10,000 9,42,000 8,25,000 10,75,000 9,50,000 97,900 76,000 1,34,600 99,500 1,47,500 1,15,000 2,937 2,280 4,038 2,985 4,425 3,450 1,00,837 78,280 1,38,638 1,02,485 1,51,925 1,18,450 Computation of relief u/s 89 ₹ ₹ 1,06,605 Particulars 2,26,085 1,19,480 92,185 Tax payable in A.Y. 2017-18 on arrears: 14,420 3,91,400 Tax on income including arrears 2,99,215 Less: Tax on income excluding arrears Tax payable in respective years on arrears: Tax on income including arrears ( ₹1,00,837 + ₹1,38,638 + ₹1,51,925) 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 Tax payable after claiming relief 2,11,665 74

SUMMARY 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 & 3200 ……………………………………………….. 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 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. 75

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. 76

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 1-1-2017. 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 1-1-2018 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 1-3-2018 he surrenders one half pension for a consolidated amount of ₹1,50,000. He has made the following payments/investments during the previous year 2017-18: (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 2018-19. Question-2 Manas has been in service of Xansa Ltd., since November 1993, in Delhi. During the financial year ending 2017-2018 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 31-12-2017 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 1-2-2018 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 2018-19. Question-3 77

Manish x a resident but not ordinarily resident individual, is employed by an Indian company. For the previous year 2017-18, 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 2017-18, 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, 2018, 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 2018-19 on the assumption that he holds 20 per cent equity share capital in the employer company and on April 1, 2018, he pays ₹300, being professional tax pertaining to the previous year 2017-18. Manish gets a pension of ₹10,000 per month from the Gujarat Government (date of retirement being March 31, 2015). 78

Question-4 Suman, an employee furnished the following particulars for previous year ending 31.03.2018: Particulars ₹ (a) Salary income as computed 6,00,000 (b) During the year arrears of salary were received not included in the above 15,000 related to 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 31-03-2018, 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 31-12-2017 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 1-2-2018, 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. 2018-19. Question-6 79

Ramesh an employee of a private sector transport company, based at Nagpur and covered by the Payment of Gratuity Act, retires on December 31, 2017 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, 2018. The following information is available: (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, 2017 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, 2017 to October 20, 2017), 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 2018- 19. Question-7 Ramesh was the General Manager of Amity Ltd. in Delhi. He retired from his service on 31-12- 2017 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. 80

(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: Particulars ₹ (a) Year ending 31-12-2014 1,10,000 (b) Year ending 31-12-2015 1,16,000 (c) Year ending 31-12-2016 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 2018-19. Question-8 Mr. Jaideep is a lecturer in a renowned private college in Baroda. During the previous year 2017-18, 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 2018-19. 81

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 Following benefits have been granted by Ved Software Ltd. to one of its employees Mr. Badri: (i) Housing loan @ 6% per annum. Amount outstanding on 1.4.2017 is ₹6,00,000. Mr. Badri pays ₹12,000 per month, on 5th of each month. (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. 2018-19.The lending rate of State Bank of India as on 1.4.2017 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 Mr. M is an area manager of M/s N. Steels Co. Ltd. During the financial year 2017-18, he gets the following emoluments from his employer: Basic Salary ₹20,000 p.m. Up to 31.8.2017 ₹25,000 p.m. From 1.9.2017 ₹2,000 p.m. Transport allowance Contribution to recognised provident fund 15% of basic salary & D.A. ₹500 p.m. for Children education allowance two children City compensatory allowance ₹300 p.m. Hostel expenses allowance ₹380 p.m. for two children Tiffin allowance (actual expenses ₹3,700) Tax paid on employment ₹5,000 p.a. ₹2,500 Compute taxable salary of Mr. M for the Assessment year 2018-19. Question-13 82

Mr. Ashok Kumar, an employee of a PSU, furnishes the following particulars for the previous year ending 31.3.2018: (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 2018-19. The rates of Income-tax for the assessment year 2008-09 are: Tax Rate (%) On first ₹1,00,000 Nil On ₹1,00,000 - ₹1,50,000 10 On ₹1,50,000 - ₹2,50,000 20 Above ₹2,50,000 30 Education cess 2 Question-14 (i) Mr. Khanna, an employee of IOL, New Delhi, a private sector company, received the following for the financial year 2017-18: (a) Basic pay ₹ (b) House rent allowance 1,80,000 (c) Special allowance 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 83

From the following particulars furnished by Mr. X for the year ended 31.3.2018, you are requested to compute his total income and tax payable for the assessment year 2018-19. (a) Mr. X retired on 31.12.2017 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. (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 31.3.18. (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 30.09.2017, 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 01.10.2017 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 2017-2018 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. 2018-2019. 84

Question-17 Ramesh retired as General manager of XYZ Co. Ltd. on 30.11.2017 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 30.6.2017 Basic pay ₹12,000 per month from 1.7.2017 Dearness allowance (Eligible for retirement 50% of basic pay benefits) 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 31.03.2018. From a fixed deposit with a bank, he earned interest income of ₹18,000 for the year ended 31.03.2018. Compute taxable income of Ramesh for the year ended 31.03.2018. Question-18 Shri Hari is the General Manager of ABC Ltd. From the following details compute the taxable income for the Assessment year 2018-19: 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 ₹30,000 duties met by the employer. Loan from recognised provident fund (maintained by the employer) ₹40,000 Value of lunch provided by the employer during office hours - Cost to ₹12,000 the 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 1.10.17 Hari made the following payments: Medical insurance premium - Paid in cash ₹2,000 - Paid by cheque ₹3,200 85

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. Question-21 Mr. Vignesh, Finance Manager of KLM Ltd., Mumbai, furnishes the following particulars for the financial year 2017-18. (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 1.8.2018 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 14.7.17 for ₹80,000. 86

Other income received by the assessee during the previous year 2017-18. 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 2017-18 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 2018- 19. 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 31.03.2018. (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. 2017-18 was ₹15.00 crores. (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 2018-19. 87

ANSWERS Answer-1 Computation of Total Income and tax liability of Mr. Yogesh for the Assessment year 2018-19 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) Transport allowance ( ₹1,400 × 9) i.e. ( ₹12,600 – exempt 70%) 900 Pension ( ₹5,000 × 2 + ₹2,500 × 1) 3,780 Commuted pension ( ₹1,50,000 – ₹1,00,000) (Note 2) 12,500 Gratuity ( ₹2,50,000 – ₹1,54,000) (Note 3) 50,000 Employer‘s contribution of U.R.P.F. 96,000 Interest on employers contribution to U.R.P.F 35,000 Gross salary 25,000 Less: Deduction 3,37,180 Income from Salary Income from other sources Nil 3,37,180 Interest received on own contribution U.R.P.F Gross total income 15,000 Less: Deduction u/s 80C (Note 4) 3,52,180 Total income Tax on ₹3,12,180 40,000 Income tax 3,12,180 Less: Rebate u/s 87A 3,109.00 Add: Education cess @ 2% 2,500.00 Add: Secondary and higher education cess @ 1% Tax liability 609.00 Tax liability rounded off 18.27 627.27 630.00 88

Note: ₹ 1. HRA is exempt to the extent of the minimum of the following: 13,500 12,600 (i) HRA received ( ₹1,500 × 9) 39,600 (ii) Rent paid -10% of salary of ₹99,000 i.e. ( ₹22,500 – ₹9,900) (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 × 1,54,000 1/2 × ₹11,000) (ii) Actual gratuity received 2,50,000 (iii) Specified amount 10,00,000 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 2018-19 Particulars ₹₹ Salary ( ₹12,000 × 9) 1,08,000 Dearness allowance ( ₹3,000 × 9) 27,000 89