1. The document discusses various principles related to taxation of salary income under different heads such as basic salary, bonuses, allowances, perquisites, retirement benefits like gratuity, pension, and provident fund. 2. It provides guidance on topics such as calculation of relief under section 89(1), treatment of various retirement benefits and allowances, exemption limits for HRA, computation of perquisite value for rent free accommodation and other assets provided by employer. 3. Important notes are given around topics like treatment of salary for 13 months or more than one financial year, assumptions if details are not provided, exemption limits for different retirement benefits and their applicability.

1. Salary
Under which head
1. Salary of partner-u/h PGBP Director fee- u/h other sources
Fees for checking/setting papers, guest lecture, honorarium - u/h other sources
Charging section Sec 15
2. There are chances that salary of more than 12 months is taxable in one year. Might be advance of
next year received in current year or salary of last year became due in this year.
E.g. Salary for April 2013 received in advance in March 2013.
In this case, taxable salary for F.Y. 12-13 shall be of 13 months i.e., April 2013+ 12 months of F.Y. 12-13
3. Basic pay scale: Always write a note of calculation of basic with months specially. Because it will
be used in RFA etc. later.
4. Bonus:-If nothing is mentioned that how calculated then assume to be on the basis of last month’s
salary.
E.g. Bonus is equal to one month basic and Salary for April 12 to Sept.12-`2,000, Oct.12 to March 13-
`3,000. Then bonus shall be `3,000.
Relief u/s 89(1)
5. Slab rates of every year have to be applied separately.
6. For calculating relief u/s 89(1) all the tax calculations have to be done including CESS, as
applicable in the respective year.
7. First calculate tax on arrears in current year, then in the year to which they are related.
E.g. Salary in 11-12 70,000 p.m. In 12-13 80,000 p.m. w.r.e.f. 1-4-11
Step 1:
(a)Tax on
(b)Tax on
Balance
Step 2:
(a)Tax on
(b)Tax on
Balance
Step 3:
Step 1 – Step 2
Important Notes

2. Salary
Retirement Benefits (General principles)
8. All Retirement benefits received during the job - TAXABLE in all the cases without any exemption.
E.g. Gratuity/leave salary received during the job- Fully Taxable
9. While solving the question if any of the limits comes out to be nil then there is no need to calculate
other limits because least of the limits is considered.
E.g. HRA received- 3,00,000, Salary- 20,00,000 p.a. and rent paid is 1,50,000 p.a.
Least of the following shall be exempt:
(i) 3,00,000
(ii) 1,50,000- 10% of 20,00,000= Nil
No need to calculate the 3rd limit as 2nd limit is coming out to be ‘NIL’ and full HRA taxable.
10. If nothing is given about the kind of Dearness allowance, write the assumption that it is not
forming part of salary for retirement benefits.
Pension
11. Write the date of retirement. Pension will start only after that.
12. In question first always calculate uncommuted pension. Because fully taxable for govt. as well non-
govt employees.
13. Exemption is always calculated on commuted value of 100% pension, not on pension actually
received.
1/2 or 1/3rd amount will be the amount of exemption (not taxable). Balance taxable.
E.g. Employee gets 40% of his pension commuted for ` 1,00,000.
Commuted value of 100% pension: 1,00,000/.40= 2,50,000
Amount of Exemption- 2,50,000/2= 1,25,000
14. Pension received by:
Employee - Taxable in the hands of employee
- Taxable u/h Salary
- 1/2 or 1/3 of 100% pension exempt
Family (in case of death) - Taxable in the hands of family
- Taxable u/h Other Sources
- 15,000 or 33.33% of actual whichever less, is exempt
Gratuity
15. Except salary write all other amounts by checking that whether covered or not.
16. If nothing is mentioned then assume that the gratuity act is not applicable.
17. Concentrate on components of salary and the period of which salary has to be taken.
18. If employee is not covered under payment of Gratuity Act, then average salary for last 10 months
is taken preceding the month of retirement, even if it falls in 11-12.

3. Salary
E.g. An employee retired on 16.6.12. Then his average salary for last 10 months shall be taken from 1-8-11 to
31-5-12 and other components shall be calculated accordingly.
Leave Salary
19. If leave salary is encashed during the continuity of employment, no exemption is available on
retirement. Such amount shall be added in rent free house because it shall be treated as monetary
payment.
20. Write all the parts and limits leaving the 4th one.
Now in case of 4th check whether data is for the entire job or yearly. Make calculations only
accordingly.
Concentrate that whether leaves actually taken given or not. If leaves actually taken not given,
then calculate it first.
E.g. Mr. J was entitled to 40 days leaves every year. His avg. monthly salary was ` 6,000. He worked for 7
years. Calculate the value of 4th limit if
(i) Leaves utilized 22 days or (ii) Leaves standing to his credit for every year were 15 days.
Ans. (i) Step 1:-
Step 2:-
Step 3:-
(ii) Step 1:-
Step 2:-
Leave entitlement
Leave unutilized
Leave utilized
Step 3:-
21. Average salary of 10 months: a. For gratuity - preceding MONTH of retirement.
(when not covered by gratuity act)
b. For leave salary - preceding DATE of retirement.
For example: If an employee retires on 16th December then,
For Gratuity- Salary till 30th November shall be taken
For leave salary- Salary till 15th December shall be taken
22. In case of gratuity or leave salary exemption of 10,00,000/3,00,000 is for the entire life of an
employee. Therefore deduct from the limit if any amount has been exempted. Compensation of
voluntary retirement can also be claimed only once in lifetime.

4. Salary
E.g. An employee retired from A ltd. and joined B ltd. He received gratuity from A ltd. and availed
exemption of 4,00,000. So from B ltd, he can claim exemption of only maximum 6,00,000.
Provident Fund
23. If nothing mentioned then assume that employee’s contribution is already included in basic salary.
Basic salary is gross before deducting EE's contribution. But do write 80C there in case of
RPF/SPF.
E.g. Mrs. Q is receiving net salary (after deduction of her RPF contribution) of ` 1,00,000. Her
contribution to PF is ` 20,000 and income from other sources is `50,000
Net Salary 1,00,000
+ Mrs. Q’s Contribution 20,000
Gross Salary 1,20,000
+Other sources 50,000
GTI 1,70,000
(-)Deduction u/c VI A- 80C 20,000
Taxable income 1,50,000
24. If employer has contributed % of Basic only then calculate actual contribution of basic only. But
for exemption 12% shall be calculated of Basic + DA(under contract) + commission of turnover.
And the difference shall be taxable. No deduction of employer's contribution to RPF in 80C.
E.g. Basic salary-1,00,000 p.a., DA(under contract)-20,000 p.a. and employer contributes 20% of basic
salary for RPF.
Employer’s contribution (20%of 1,00,000) = 20,000
(-)Exempt [12% of (1,00,000+20,000)] = 14,400
Taxable 56,000
25. If nothing is mentioned in question assume it to be RPF.
26. If in question amount is received from RPF, then nothing is taxable at the time of retirement if the
period of service is more than 5 years or any other 2 conditions are satisfied.
27. Loan from RPF lying with government is not taxable because it is not given by employer.
28. In case of transfer from URPF to RPF :
Employer’s contribution (in excess of 12%) and Interest on both (in excess of 9.5%) shall be charged
to tax (added to salary) in the year of conversion.
NPS(Pension scheme of central govt.) sec. 80CCD:-
29. The treatment is different from RPF. Do not mix up with RPF.
30. Contribution of employee is always part of basic salary. But deduction u/s 80CCD shall be only of
10% of basic + DA under contract. Commission not taken.
31. Total Contribution(no limit applicable while adding in salary) made by CG/Employer in pension
scheme shall be added in the salary of employee. Deduction u/s 80CCD shall be only of 10% of
basic + DA under contract.
Allowances

5. Salary
32. Children education allowance- Exemption has to be calculated for every child separately.
For example: Employer gave CEA for 1st child- 130 p.m. & 2nd child- 70 p.m. Then in total we cannot give
exemption of 200, only 170 p.m. for both will be allowed.
33. Children education allowance and hostel expenditure allowance is given for any two children
which includes a step and adopted child but not a grandchild.
34. Actual amount spent is irrelevant for allowances where limits are specified.
E.g. Transport allowance given to employee for commuting between office and residence `1,000 p.m.
However actual expenditure incurred was 750 p.m.
Transport allowance(1,000-800)12 = 2,400
35. City compensatory allowance(CCA) is fully taxable because any allowance other than 14
allowances are fully taxable.
HRA
36. If any factor such as rent paid, salary or actual HRA changes during the year, then calculations
have to be made separately for those months. So decide with the help of chart that how many
times calculations shall be done.
E.g. Employee gets HRA of ` 7,000 p.m. which was increased to `10,000 w.e.f. 1.1.2013. Till 30.6.12 he pays
no rent but from 1.7.12 he pays rent of 4,000p.m. Salary is ` 20,000 p.m.
Chart for computation of HRA:
1st April to 31st March
1st April to 31st December 1st January to 31st March
1st April to 30th June 1st July to 31st December
37. The period /months during which no rent is paid to any person, full HRA shall be taxable. Those
months HRA shall be kept separate and fully taxable.
E.g. HRA received- 3,00,000, salary- 1,20,000 p.a. and rent paid is nil
No need to calculate the limits as rent paid is ‘NIL’ and full HRA shall be taxable.
38. Exemption of HRA shall be allowed even if rent is paid to father, mother or spouse etc.
39. Place of office is not relevant, place of residence matters.
E.g. If office is in Delhi and he resides in Gurgaon, then we will take 40% of salary as taxable.
40. In case of HRA, if nothing is mentioned about the place then assume it to be a non-metropolitan
city & apply 40%
Perquisites(General principles)

6. Salary
41. If any perquisite is solely given for official purposes or during office hours, then it shall not be
taxable(included) under head salary because no benefit is received by employee.
E.g. An employer gives a car/club/credit card to its employee for office use.
Nothing shall be taxable for employee in this case as no personal benefit is received by employee.
42. Do not forget to deduct the amount recovered from value of perquisite in all the cases.
RFA
43. While solving question of RFA first always write the period for which the house is given.
Salary of only that period shall be taken. Remember negative list(things not to be included).
DA(NOT under contract), every type of perquisite(whether in kind or reimbursement), employer
contribution to PF & Interest.
44. If in question: FRV (fair rental value)- means house owned by employer
Lease rent- house taken on rent
45. If population of city is not given, then write assumption of 15%.
46. If house is taken on rent or given by government, population of city is not relevant.
47. Any maintenance charges or repairs of house shall be ignored.
48. Value of furniture has to be calculated separately for all the cases including govt. employee.
49. WDV/FMV of furniture is irrelevant. 10% of actual cost (purchase price of employer)taken.
E.g. Employer provided furniture with the house cost of which was 20,000 ` .Its WDV is 3,000 and
FMV is 4,000. Value of furniture shall be 10% of 20,000 = 2,000
50. RFA in case of accommodation in hotel shall remain same whether a govt. employee or not and
value of furniture is not added.
51. If any asset or furniture has been given along with house, be extra cautious in making block of the
date from when the asset was given. As it might have been given in the mid of year.
52. If any advance salary is drawn then it shall not be included in computation of salary for RFA.
However while computing income under head salary, advance salary shall be included.
Value of Interest free Loan
53. If loan is taken for specified diseases, then nothing taxable. No limit of 20,000.
54. In other cases upto 20,000 on the last day of month, then also nothing taxable.
E.g. A took interest free loan from his employer ` 50,000 on 1-4-12. However, he repaid 35,000 on 29-4-12.
Nothing shall be taxable because on 30-4-12 value of loan is only ` 15,000.
55. Calculate interest for every month separately. Focus on the outstanding amount on the last day of
each month.
56. Rate of interest shall always be only of 1st April of SBI irrespective of time of loan. Deduct the rate
recovered from the employer.

7. Salary
E.g. A took loan @ 4% from his employer on 1-6-12 of ` 50,000. Rate of SBI on the date of loan was 12%
and on 1-4-12 it was 10%.
Rate of interest shall be 10% - 4% = 6%
Value of interest free loan shall be 50,000 X 10/12 X 6/100 = 2,500
57. If loan is taken from RPF maintained by employer then nothing taxable because it is not any
benefit given by employee.
Use of movable assets
58. Laptops, computer and telephone are fully exempt even if given for personal purposes. Telephone
bills or any other type of benefit in relation to phone is exempt. But mamu na ban jaan telephone
allowance is fully taxable.
59. For other assets 10% principle applicable just like furniture and car.
60. Fix the days during which given to employee. Taxable only proportionately.
61. If ownership of any asset is not transferred by the employer, then it is use of asset & not transfer of
asset. Read the question carefully that whether we are concerned with use or transfer.
62. For computing use of asset & interest free loan calculation must be done in days.
Transfer of Movable assets
63. Actual cost to the employer is taken, no concept of WDV or fair market value.
64. Give depreciation only for complete 12 months of use (not financial year). If any use of less than 12
months left then no depreciation.
65. Depreciation is given for the period it was given by employer to employee for use. Do not forget
to add the value of use in the income of employee.
E.g. Employer purchased furniture on 1-6-10 for ` 20,000. He gives the furniture to his employee for use on
1-4-12 and transferred the same on 1-7-12 for `3,000.
Other Fringe benefits
66. Gift in cash, cheque, cash voucher, ex-gratia is fully taxable. No exemption of 5,000. If given to
employee on marriage then also 5,000 not u/h other sources. As per ICAI.
67. In case of free meals, 25 working days in a month shall be assumed.
68. Tea or snacks (provided during office hours) are exempt without any limit.
69. Expenses on use of health club, sport facilities are exempt. If mentioned only club, then fully
taxable assuming for personal purposes of employee.
LTC
70. In case the LTC is encashed without performing the journey, the entire amount received by the
employee would be taxable.

8. Salary
71. If LTC is given for outside India, then it shall be fully taxable.
72. Only one journey can be carried forward to next block and that also it has to be used only in the
first year of next block. If not used in the first year then it shall expire. If nothing mentioned then
assume to be the first journey in the block.
73. Calendar year has to be used for block. (No financial year)
Medical Perquisites
74. In case of reimbursement of medical facilities exemption is allowed upto maximum of ` 15,000 per
year for the entire family and any amount exceeding 15,000 shall be taxable.
75. In medical perquisites, no limit of children while in LTC purane saare naye 2 bache. Parents, bro
sis only if dependant. Medical allowance fully taxable.
Deductions under section 16
76. Professional tax -If paid by employer- first add in salary then allow deduction
If paid by employee- Allow deduction (not to be added first)
E.g. Basic Salary- 2,00,000, DA- 20,000, Professional Tax paid by employee- 5,000 and by employer-
8,000
Basic Salary 2,00,000
DA 20,000
Professional Tax of employer 8,000
Gross Salary = 2,28,000
(-) Deduction u/s 16
Professional Tax (8,000+5,000) (13,000)
Net Salary 2,15,000
77. Under income tax act there is no limit of deduction. Deduction shall be allowed only on paid
basis.(irrespective of the year and amount)
Children education
78. Unlimited bachey. 1,000 is per month. Not for brother sister even if dependant. Deduct the
amount recovered from employee.
Motor Car
79. If nothing is given, assume that the car is upto 1.6 ltrs. (chote) and expenses by employee.
80. If car of employer and partly used then actual % of personal use not relevant. But when car owned
by employee then actual use for personal or limit whichever higher deducted.
E.g. Employee uses his own car for official and personal purpose both. Total expenditure incurred by
employer is `50,000.Car is used 30% for official and 70% for personal purposes.
Total Expenditure 50,000

9. Salary
Less: 1,800 X 12= 21,600
Or
50,000 X 30%=15,000 21,600
28,400