This document defines taxable salary and allowances under Indian income tax law. It discusses what constitutes salary and outlines tax treatment of various common allowances such as housing, transport, education and entertainment allowances. It also summarizes valuation and taxability of various perquisites and benefits provided by employers like rent-free housing, use of cars, domestic servants, gas, electricity and water supply. The document also covers taxability of contributions to and payments from provident funds and pension plans as well as gratuity and commuted pension received by government and non-government employees in India.

1. Rule of Salary
Meaning of Salary: In salary, Basic Salary, Wages, Pension, Fees, Bonus, Commission, Annuity, Taxable
Allowance, Taxable Perquisites, Advance Salary, Profit in lieu of salary, Employer’s contribution in
Recognized Provident Fund and Interest there on etc. is included.
Note: Salary of MLA and MP is not taxable under the head ‘Salary’.
Allowances
1- Taxable Allowance: Dearness allowance, Dearness pay, Fixed medical allowance, Servant
allowance, City compensation allowance, Over-time allowance, Procter’s allowance, Warden’s
allowance, Non-practicing allowance, Tiffin allowance, Deputation allowance, Other allowance:
Family, Marriage, Field, Project, Children, Cloth, Rural & Shift allowance.
2- Partially Taxable & Exempted Allowance:
a. House rent allowance:
i. If the employee lives in the self-house and he is receiving H.R.A. (Actual amount of
H.R.A. will be fully taxable)
ii. If the employee lives as a tenant and he does not pay any rent. (Actual amount of
H.R.A. will be fully taxable)
iii. If the employee lives as a tenant and he pays some rent. (Which ever is less than in
its amount Exempt)
Actual amount received of H.R.A. ----------
Excess Rent Paid:
Rent paid --------
Less - 10% of Salary -------- ----------
40% or 50% of Salary ----------
(M.K.C.D.)
Taxable H.R.A. = Actual H.R.A. received - Exempt amount
Note: Salary meaning: Basic Pay + Dearness pay+ Dearness allowance (Under the term of
employment) + % Basis of commission on sales.
b. Education Allowance: Exempt amount Rs. 100 p.m. per child upto a maximum of two
children.
c. Hostel Allowance: Exempt amount Rs. 300 p.m. per child upto a maximum of two children.
d. Cast Area Allowance: Rs. 200 p.m. exempt in declared states and balance taxable. This
allowance is not exempt in Rajasthan.
e. Special Allowance to employees engaged in transportation: 70% of allowance or Rs. 6,000
p.m. (which ever is less than) is exempt from tax.
f. Entertainment Allowance: Actual amount entertainment allowance given to Govt. and
Non-Govt. employees shall be included in the gross salary of the employee & than
deduction of E.A.-
g. Transport Allowance: Exempt amount Rs.800 p.m.
Exempt amount Rs.1,600 p.m. (In the case of Blind person &
Handicapped person).
3- Fully Exempt Allowance: Conveyance allowance, Foreign allowance, Allowance’s to High-court
Judges, Allowance from United Nation Organization, Passage money, Tour allowance, Daily
allowance, Study allowance, Dress allowance, Helper allowance and Traveling allowance.
In the case of Govt. employee In the case of No.-Govt. employee
 Actual Amount of E.A. ------
 Fixed Amount Rs. 5,000
 20% of Basic Pay -------
(Which ever id less than exempt)
w.e.f. A.Y. 2002-03, no deduction of
entertainment allowance to Non-Govt.
employee shall be allowed.
Fully Taxable

2. Valuation of Perquisites
1- Valuation of unfurnished residential house (Rent Free House)
Govt. Employee
Non-Govt. Employee
If house is owned by
employer
If the house is hired or
taken on rent by the
employer
In the case of Hotel
Actual value as per
Govt. Rule in any
cities.
All amounts will be
Taxable.
License Fees
7.5% of Salary if the
population of the city upto
10 Lac or 10 Lac.
or
10% of Salary if the
population of the city is
more than 10 Lac & less than
25 Lac.
or
15% of Salary if the
population of the city is
more than 25 Lac.
(i) Actual Rent paid by
the employer.
or
(ii) 15% of Salary
(Which ever is less than
in its amount Taxable)
Any city
(i) Actual Charges paid
by employer/ employee
or
(ii) 24% of Salary
(Which ever is less than
in its amount Taxable)
Any city
2- Valuation of furnished house:
Value of unfurnished house as above
+
10% Cost of furniture or Actual rent of furniture (Ist preference for rent.)
3- Valuation of concessional unfurnished and furnished house:
Calculated value in the case (1 & 2) as above --------
Less- Rent paid by the employee --------
or
Rent deducted out of salary of employee -------- --------
Balance Amount Taxable --------
Note: Salary meaning: Basic pay (except advance & arrears of salary)+ Dearness pay + Dearness
allowance (If it is under the term of employment) + Fees + Bonus + Commission on sales
+ All taxable allowance paid by the employer.
4- Payment of liabilities of employee by the employer: Specified actual amount paid by
employer for all type of employees is Taxable.
5- Valuation of facilities of Gass, Electricity & Water:
From own sources From outside sources
All facilities supplies by
the employer from its own
sources.
All actual amount fully
Taxable.
 For only office use
 For only personal use
 For personal & office
use
Nill
Actual amount paid by the employee
(Taxable)
Toal expenses-Paid expenses by the
employee= Taxable
6- Valuation of Sweeper, Watchman, Gardner & Any other domestic servant:
If servants are appointed by the employer
facility of Sweeper, Gardner, Watchman & other
domestic servant
Fully amount of salary is Taxable (For specified
employee)
If servants are appointed by the
Employees and payments are paid by the
employer
Actual amount paid to each servant is Taxable.
(For specified or Non-specified employee)

3. 7- Valuation of Motor Car:
If motor car is owned or hired by
employer
If motor car is used for official
purpose
Nil
If motor car is used for official
purpose exclusively for the private
purpose
Actual Amount of Exp. +
Salary of driver + Normal wear
and tear (Dep. @ 10%) or Hire
Charges – Amount charged
from employee for such use.
If motor car is used for official
purpose and Private & Personal
Purpose
For upto 16,00cc or 1,600cc
Rs. 1,800 p.m.
Or
For more than 16,00cc
Rs. 2,400 p.m.
+
Driver Salary Rs. 900 p.m
If motor car is owned by
employee and reimbursed by the
employer
If motor car is used for official
purpose
Nil
If motor car is used for official
purpose exclusively for the private
purpose
Actual amount paid by
employer. All Amount
Taxable (all category of
employees)
If motor car is used for official
purpose and Private & Personal
Purpose
Actual amount Paid by
employer – Amount Exempted
by the previous rule.
Provident Fund
Particulars Statutory Provident
Fund
Recognized Provident
Fund
Unrecognized
Provident Fund
Employee contribution
included in taxable
salaries
Exempt U/S – 89 Exempt Exempt
Employer’s
contribution
Exempt Taxable amount
excess 12% of salary
Exempt
Interest of P.F. Exempt Taxable amount excess
9.5% of interest
amount.
Exempt
Lumpsum amount at
the time of retirement
U/S – 10 (11) Exempt Exempt because the
employee has served 5
years & under 5 years.
Only employer
contribution portion is
Taxable with interest
Note: Salary Meaning – H.R.A. salary.
Death-cum-retirement Gratuity
Govt. Employee
Non- Govt. Employee
Payment under Gratuity Act, 1972 Payment under Not-covered
Gratuity Act, 1972
Actual Amount of
Gratuity Received
Full Exempt
1. Actual amount received -------
2. Fixed amount Rs. 10,00,000
3. Calculation of amount:
Last month salary *15 days * Whole time of
service / 26 days
(Which ever is less than amount Exempt)
Note:
 Basic pay + D.A. + D.P..
 Full year consider more than 6
month or 6 month service.
1. Actual amount received -------
2. Fixed amount Rs. 10,00,000
3. Calculation of amount:
Average salary of Last 10 month *15 days *
Whole time of service / 30 days
(Which ever is less than amount Exempt)
Note:
 H.R.A. salary
 Excluding part of last year service.
Taxable Amount = Gratuity Received – Exempt Amount

4. Pension
(i) Uncommuted Pension: Uncommuted Pension received monthly by a retired employee from his
employer is included in salary.
(ii) Commuted Pension:
Govt. Employee
Non- Govt. Employee
If the employee will be Gratuity
received
If the employee will not be
Gratuity received
Actual amount of
commuted pension
will be Exempt.
1- Actual amount received ------
2- Calculation of full amount of
pension ------
3- 1/3 Amount of full pension
Exempt
1- Actual amount received ------
2- Calculation of full amount of
pension ------
3- 1/2 Amount of full pension
Exempt
Taxable Amount = Actual Amount Received – Exempt Amount