How to Calculate Income Tax on Pension Income

How to Calculate Income Tax on Pension Income or Tax Treatment of Pension Income, Income Tax on Family Pension or How to Compute Tax on Pension Income these are the general question at the time of retirement every person has it? 

Pension income can be the in the form of monthly income or onetime payment (Commuted pension) made by the employer at the time of retirement or death of an employee. In case of the Government employees onetime pension income is not taxable but for others it will be taxable subject to certain conditions given under the income tax act.

In case of monthly pension income it will be taxed at the “normal slab rates” of the income tax act. ( Check Income Tax Slab Rate https://vatfaq.in/income-tax-slab-income-tax-rates-for-fy-2013-14-ay-2014-15.html)

Pension Income Not Taxable for following persons

  1. Pension received from UNO by the employee or his family member is exempt
  2. Family pension received by the family member of deceased employee is taxable in the hand of family member in the head income from other sources but family pension received by family member of deceased armed force employee will be exmepted from Income Tax.
  3. Judge of supreme court and high court will be entitled to the exemption of the commuted pension

Pension Income Tax Treatment or Income Tax Calculation on Pension Income  

  1. Monthly/uncommuted pension: Taxable in case of all employees
  2. Commuted pension:

    i) Government employee
    – Exemption is available under section 10(10A)

    (Central/state/PSU/local authority/statuary Corporation)

    ii) Non-Government employee

Receiving Gratuity with pension

Not Receiving Gratuity with pension

1/3 of 100% of commuted pension is exempt

½ of 100% of commuted pension is exempt

Income Tax Treatment for Pension Scheme of Central Government Employees

Pension scheme in case of an employee joining central government on or after jan,1,2004

  • It is mandatory for persons entering the services of the CG on or after Jan.2004 to contribute 10% of salary every month towards their pension account & Govt. also contribute at the same rate
  • Salary= Basic pay + D.A.(if)
  • Contribution by CG is included in salary of employees
  • Deduction u/s 80C will not be available if deduction is claimed u/s 80CCD
  • When pension is received out of the aforesaid amount it will be chargeable to tax in the hand of family member in the head income from other sources

Reference: Section 10(19) of Income Tax Act, 1961 and Rule 2BBA of Income Tax Rules

Section 10(19) of Income Tax Act: Income Exempted from Income Tax

(19) family pension received by the widow or children or nominated heirs, as the case may be, of a member of the armed forces (including para-military forces) of the Union, where the death of such member has occurred in the course of operational duties, in such circumstances and subject to such conditions, as may be prescribed.

Circumstances and conditions for the purposes of clause (19) of section 10.

2BBA. (1) For the purposes of clause (19) of section 10, the circumstances of death of a member of the armed forces (including para-military forces) of the Union in the course of operational duties shall be the following, namely :—

(i)  acts of violence or kidnapping or attacks by terrorists or anti-social elements;

(ii)  action against extremists or anti-social elements;

(iii) enemy action in international war;

(iv) action during deployment with a peace keeping mission abroad;

(v)  border skirmishes;

(vi)  laying or clearance of mines including enemy mines as also mine sweeping operations;

(vii) explosions of mines while laying operationally oriented mine-fields or lifting or negotiation mine-fields laid by the enemy or own forces in operational areas near international borders or the line of control;

(viii) in the aid of civil power in dealing with natural calamities and rescue operations;

(ix) in the aid of civil power in quelling agitation or riots or revolts by demonstrators.

(2) It shall be certified by the Head of the Department where the deceased member of the armed forces (including para-military forces) last served, or the service headquarters, as the case may be, that the death of such member has occurred in the course of operational duties in circumstances mentioned in sub-rule (1).

 

Taxability on Leave Salary under Section 10(10AA) of Income Tax Act

Leave salary also known as leave encashment which means that employee will receive the cash for leaves which are not taken by the employees. Employee can encash his leaves during the course of employment but this amount will be fully taxable or he can encash at the time of retirement but the taxability of that amount depends on fulfillment of the certain conditions given under the income tax act.

Also Read Income Tax Calculation on Pension Income 

For Government Employees except local authorities leave encashment at the time of retirement is exempted from the tax u/s 10(10AA). While leave encashment during the service period is taxable for all the employees and its taxable as per the income tax slab rate which is applicable to that individual.

  1. At the time of services:

    Amount received Fully Taxable

  2. At the time of retirement:
    1. Government employee (central or state) – Fully exempt
    2. Non-Government employee

      Exempt least of the following:

  • Actual Receipt
  • Standard Limit=3,00,000 (maximum- reduced by an earlier exempted amount)
  • Total salary of preceding 10months from the date of retirement
  • average salary of 10months X leave credit

Calculation of Leave credit at the time of retirement

Leave entitlement- completed service X standard leave (consider max. 30 days)

Less: Leave already availed

Less: Leave encashed during the service period

Leave credit at the time of retirement

  • (Leave credit should be in according to 30 days leave of every year of actual completed services)

Note: – salary= Basic pay + DA (if) + commission (%)

Average salary= (Basic pay + D.A.(if)+ % commission of 10 months immidetly @preciding from the date of retirement)/10

Read Meaning of Basic Salary for HRA Calculation

How to Calculate Income Tax Liability on Gratuity [Sec 10(10)]

Gratuity is a retirement benefit generally payable at the time of cessation of employment and on the basis of duration of service.

If gratuity is received during service period is fully taxable for all kinds of employees i.e. for govt. and non govt. employees.

But only non government employees have to worry about his tax liability on gratuity because gratuity received by government employees at the time of retirement or death is exempted from tax. For Non Government employees income tax act has given the benefit by giving certain exemption limits upto which gratuity received by him is not taxable but there is a maximum limit of Rs 10 lakhs upto which he can claim exemption.

  1. Government employee (central /state /local authority): Gratuity received at the time of retirement fully exempt from income tax under income tax act, 1961.
  2. Non-Government employee: Exempted upto specified limit

Covered under gratuity act,1972

Not Covered under gratuity act,1972

Least is exempt:

  1. Actual receipt
  2. Maximum limit 10,00,000 (fixed)*
  3. 15/26 × salary last drawn ×rounded years of services

Least is exempt:

  1. Actual receipt
  2. Maximum limit 10,00,000 (reduced)*
  3. 15/30× Average salary × completed years of services

 Salary means: Basic pay + D.A.

Average salary means

=(Basic pay + D.A.(if)+ % commission,of 10 months immediately preceding from the month of retirement)/10

Note:-

  • 7/26 is to be considered in place of 15/26 in case of seasonal establishment.
  • In case of piece rated employees’ average salary for last 3 months immediately preceding the date of retirement should be considered.

*If gratuity act doesn’t apply standard limit 1000000 (reduced) means reduce the standard limit by an amount of which exemption is taken in any previous year.

How Calculate Your Income from salary for Income Tax

Every Salaried person is always worried about his tax liability and one of the basic concern is what will be his taxable salary under income tax act, and for which he always need some consultation from tax advisors.

Generally salary has few basic components which one must know in order to calculate his taxable salary. Income Tax Return for AY 2013-14 for Salaried Person


These are Basic Salary, Dearness Allowance, House Rent Allowance (after deduction, if you are residing in rented house), Bonus, Salary in lieu of leave (Not taxable upto specified limits) and any other benefits or perquisite less deduction for entertainment allowance and professional tax. View Form 26AS TDS Deduction Status Online


Computation of salary Income

Basic Salary ×××××
Dearness Allowance ×××××
House Rent Allowance ×××××
Pension ×××××
Annuity ×××××
Bonus ×××××
Commission ×××××
Arrears of salary ×××××
Advances of salary ×××××
Allowances ×××××
Total ×××××
Add: Gratuity ×××××
Leave encashment ×××××
Value of perquisite ×××××
Gross Taxable salary ×××××
Less: deduction allowed u/s 16 ×××××
Deduction allowed u/s 80C ×××××
Income chargeable under the head salary ×××××


Taxability of Perquisite

List of Perquisite which are taxable under income tax act Taxable for all categories of employee:

  1. RFA furnished or unfurnished
  2. Concession in rent
  3. Obligation of the employee met by employer
  • Salary to Gardner / watchman / sweeper or a personal attendant appointed by employer paid by employer
  • Gas, electricity, water or household consumption if connection is in the name of employer and bills are paid by employer
  • Education facility to the member of employees household if bill are issued in the name of employer and paid by employer
  1. Amount payable directly or indirectly to effect an assurance on the life or an annuity (not being RPF etc.)
  2. Notified fringe benefit
  3. Interest free or concessional loan
  4. Use of movable assets by employee or member of his household (other than laptop and computer)
  5. Transfer of movable assets to employee or member of his household
  6. Any medical facility to employee or member of his household other than
    1. Hospital maintained by the employer
    2. Hospital maintained by the Government or any local authority or approved by the Government for medical treatment of Government employee
    3. In respect of prescribed diseases or ailments, in any hospital approved by the Chief commissioner
    4. Health insurance premium under any scheme of central government (2007-2008 A.Y.)

      And bill in the name of employee and paid or reimbursed by employer (in excess of Rs.15000 per A.Y)

Taxable for specified employee:

Following are also taxable

  • Salary to Gardner / watchman / sweeper or a personal attendant appointed by employer paid by employer
  • Gas, electricity, water or household consumption if connection is in the name of employer and bills are paid by employer
  • Education facility to the member of employees household if bill are issued in the name of employer and paid by employer
  • Any medical facility to the employee or member of his household other than
  1. Hospital maintained by the employer
  2. Hospital maintained by the Government or any local authority or approved by the Government for medical treatment of Government employee.
  3. In respect of prescribed diseases or ailments, in any hospital approved by the Chief commissioner
  4. Health insurance premium under any scheme of central government (2007-2008 A.Y.)

    And bill in the name of employee and paid or reimbursed by employer (in excess of Rs.15000 per A.Y)


 

List of Tax Free Perquisite

There are different perquisites which are tax free in nature.  Below list of perquisites is for Salaried employees and these perquisites are exempted from income tax in India. Income Tax Section 17 and Rule 3 deals with valuation and taxation of perquisites. Perquisites can be categorized in three categories 1.Perquisites Tax Free for All Employees 2.Perquisites Taxable for specified Employees  3.Perquisites Taxable for All Employees

List of Tax Free perquisites is given below:

  1. Medical facility or reimbursement
  2. Refresher courses
  3. Shares under ESOP/ESOS
  4. Free telephone and mobile facility (FBT)
  5. Tax on non-monetary perquisite paid by employer
  6. Free use of laptop/computer
  7. Leave travel concession
  8. Food and beverages provided to employees
  9. Facilities in general

Taxable Perquisites/Facilities Provided by Employer 

  1. Motor car facility and expenses ( Read Valuation of Car, Car Expenses and Driver Salary)
  2. Rent free house/conveyance facility (Read Valuation and Exmeption Rules for Rent Free Accommodation)
  3. Judge of supreme/high court
  4. Education facility for children of employee: if cost doesn’t exceed Rs. 1000
  5. Use of health club, sports etc. provided by the employer(FBT)
  6. Accommodation in remote area ( Meaning of remote Area and Who is eligible for exemption)
  7. Residence of officials of parliament
  8. Loans to employee
  9. All other perquisite provided shall be tax free

Valuation of Different Perquisites for Income Tax Calculation

(3) The value of benefit to the employee or any member of his household resulting from the provision by the employer of services of a sweeper, a gardener, a watchman or a personal attendant, shall be the actual cost to the employer. The actual cost in such a case shall be the total amount of salary paid or payable by the employer or any other person on his behalf for such services as reduced by any amount paid by the employee for such services.

(4) The value of the benefit to the employee resulting from the supply of gas, electric energy or water for his household consumption shall be determined as the sum equal to the amount paid on that account by the employer to the agency supplying the gas, electric energy or water. Where such supply is made from resources owned by the employer, without purchasing them from any other outside agency, the value of perquisite would be the manufacturing cost per unit incurred by the employer. Where the employee is paying any amount in respect of such services, the amount so paid shall be deducted from the value so arrived at.

(5) The value of benefit to the employee resulting from the provision of free or concessional educational facilities for any member of his household shall be determined as the sum equal to the amount of expenditure incurred by the employer in that behalf or where the educational institution is itself maintained and owned by the employer or where free educational facilities for such member of employees’ household are allowed in any other educational institution by reason of his being in employment of that employer, the value of the perquisite to the employee shall be determined with reference to the cost of such education in a similar institution in or near the locality. Where any amount is paid or recovered from the employee on that account, the value of benefit shall be reduced by the amount so paid or recovered :

Provided that where the educational institution itself is maintained and owned by the employer and free educational facilities are provided to the children of the employee or where such free educational facilities are provided in any institution by reason of his being in employment of that employer, nothing contained in this sub-rule shall apply if the cost of such education or the value of such benefit per child does not exceed one thousand rupees per month.

(6) The value of any benefit or amenity resulting from the provision by an employer who is engaged in the carriage of passengers or goods, to any employee or to any member of his household for personal or private journey free of cost or at concessional fare, in any conveyance owned, leased or made available by any other arrangement by such employer for the purpose of transport of passengers or goods shall be taken to be the value at which such benefit or amenity is offered by such employer to the public as reduced by the amount, if any, paid by or recovered from the employee for such benefit or amenity :

Provided that nothing contained in this sub-rule shall apply to the employees of an airline or the railways.

(7) In terms of provisions contained in sub-clause (viii) of clause (2) of section 17, the following other benefits or amenities and value thereof shall be determined in the manner provided hereunder:

(i)  The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan for any purpose made available to the employee or any member of his household during the relevant previous year by the employer or any person on his behalf shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India, constituted under the State Bank of India Act, 1955 (23 of 1955), 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 as reduced by the interest, if any, actually paid by him or any such member of his household:

Provided that no value would be charged if such loans are made available for medical treatment in respect of diseases specified in rule 3A of these Rules or where the amount of loans are petty not exceeding in the aggregate twenty thousand rupees:

Provided further that where the benefit relates to the loans made available for medical treatment referred to above, the exemption so provided shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

(ii)  The value of travelling, touring, accommodation and any other expenses paid for or borne or reimbursed by the employer for any holiday availed of by the employee or any member of his household, other than concession or assistance referred to in rule 2B of these rules, shall be determined as the sum equal to the amount of the expenditure incurred by such employer in that behalf. Where such facility is maintained by the employer, and is not available uniformly to all employees, the value of benefit shall be taken to be the value at which such facilities are offered by other agencies to the public. Where the employee is on official tour and the expenses are incurred in respect of any member of his household accompanying him, the amount of expenditure so incurred shall also be a fringe benefit or amenity:

Provided that where any official tour is extended as a vacation, the value of such fringe benefit shall be limited to the expenses incurred in relation to such extended period of stay or vacation. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity.

(iii) The value of free food and non-alcoholic beverages provided by the employer to an employee shall be the amount of expenditure incurred by such employer. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity:

Provided that nothing contained in this clause shall apply to free food and non-alcoholic beverages provided by such employer during working hours at office or business premises or through paid vouchers which are not transferable and usable only at eating joints, to the extent the value thereof either case does not exceed fifty rupees per meal or to tea or snacks provided during working hours or to free food and non-alcoholic beverages during working hours provided in a remote area or an off-shore installation.

(iv) The value of any gift, or voucher, or token in lieu of which such gift may be received by the employee or by member of his household on ceremonial occasions or otherwise from the employer shall be determined as the sum equal to the amount of such gift:

Provided that where the value of such gift, voucher or token, as the case may be, is below five thousand rupees in the aggregate during the previous year, the value of perquisite shall be taken as “nil“.

(v) The amount of expenses including membership fees and annual fees incurred by the employee or any member of his household, which is charged to a credit card (including any add-on-card) provided by the employer, or otherwise, paid for or reimbursed by such employer shall be taken to be the value of perquisite chargeable to tax as reduced by the amount, if any paid or recovered from the employee for such benefit or amenity:

Provided that there shall be no value of such benefit where expenses are incurred wholly and exclusively for official purposes and the following conditions are fulfilled:—

(a)  complete details in respect of such expenditure are maintained by the employer which may, inter alia, include the date of expenditure and the nature of expenditure;

(b)  the employer gives a certificate for such expenditure to the effect that the same was incurred wholly and exclusively for the performance of official duties.

(vi) (A) The value of benefit to the employee resulting from the payment or reimbursement by the employer of any expenditure incurred (including the amount of annual or periodical fee) in a club by him or by a member of his household shall be determined to be the actual amount of expenditure incurred or reimbursed by such employer on that account. The amount so determined shall be reduced by the amount, if any paid or recovered from the employee for such benefit or amenity:

Provided that where the employer has obtained corporate membership of the club and the facility is enjoyed by the employee or any member of his household, the value of perquisite shall not include the initial fee paid for acquiring such corporate membership.

(B) Nothing contained in this clause shall apply if such expenditure is incurred wholly and exclusively for business purposes and the following conditions are fulfilled:—

 (a)  complete details in respect of such expenditure are maintained by the employer which may, inter alia, include the date of expenditure, the nature of expenditure and its business expediency;

 (b)  the employer gives a certificate for such expenditure to the effect that the same was incurred wholly and exclusively for the performance of official duties.

(C) Nothing contained in this clause shall apply for use of health club, sports and similar facilities provided uniformly to all employees by the employer.

(vii) The value of benefit to the employee resulting from the use by the employee or any member of his household of any movable asset (other than assets already specified in this rule and other than laptops and computers) belonging to the employer or hired by him shall be determined at 10 per cent per annum of the actual cost of such asset or the amount of rent or charge paid or payable by the employer, as the case may be, as reduced by the amount, if any, paid or recovered from the employee for such use.

(viii) The value of benefit to the employee arising from the transfer of any movable asset belonging to the employer directly or indirectly to the employee or any member of his household shall be determined to be the amount representing the actual cost of such assets to the employer as reduced by the cost of normal wear and tear calculated at the rate of 10 per cent of such cost for each completed year during which such asset was put to use by the employer and as further reduced by the amount, if any, paid or recovered from the employee being the consideration for such transfer :

Provided that in the case of computers and electronic items, the normal wear and tear would be calculated at the rate of 50 per cent and in the case of motor cars at the rate of 20 per cent by the reducing balance method.

(ix) The value of any other benefit or amenity, service, right or privilege provided by the employer shall be determined on the basis of cost to the employer under an arm’s length transaction as reduced by the employee’s contribution, if any :

Provided that nothing contained in this clause shall apply to the expenses on telephones including a mobile phone actually incurred on behalf of the employee by the employer.

(8)(i) For the purposes of sub-clause (vi) of clause (2) of section 17, the fair market value of any specified security or sweat equity share, being an equity share in a company, on the date on which the option is exercised by the employee, shall be determined in accordance with the provisions of clause (ii) or clause (iii).

(ii) In a case where, on the date of the exercising of the option, the share in the company is listed on a recognized stock exchange, the fair market value shall be the average of the opening price and closing price of the share on that date on the said stock exchange :

Provided that where, on the date of exercising of the option, the share is listed on more than one recognized stock exchanges, the fair market value shall be the average of opening price and closing price of the share on the recognised stock exchange which records the highest volume of trading in the share :

Provided further that where, on the date of exercising of the option, there is no trading in the share on any recognized stock exchange, the fair market value shall be—

(a)  the closing price of the share on any recognised stock exchange on a date closest to the date of exercising of the option and immediately preceding such date; or

(b)  the closing price of the share on a recognised stock exchange, which records the highest volume of trading in such share, if the closing price, as on the date closest to the date of exercising of the option and immediately preceding such date, is recorded on more than one recognized stock exchange.

(iii) In a case where, on the date of exercising of the option, the share in the company is not listed on a recognised stock exchange, the fair market value shall be such value of the share in the company as determined by a merchant banker on the specified date.

(iv) For the purpose of this sub-rule,—

(a)  “closing price” of a share on a recognised stock exchange on a date shall be the price of the last settlement on such date on such stock exchange :

Provided that where the stock exchange quotes both “buy” and “sell” prices, the closing price shall be the “sell” price of the last settlement;

(b)  “merchant banker” means category I merchant banker registered with Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(c)  “opening price” of a share on a recognised stock exchange on a date shall be the price of the first settlement on such date on such stock exchange :

Provided that where the stock exchange quotes both “buy” and “sell” prices, the opening price shall be the “sell” price of the first settlement;

(d)  “recognised stock exchange” shall have the same meaning assigned to it in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

(e)  “specified date” means,—

 (i)  the date of exercising of the option; or

(ii)  any date earlier than the date of the exercising of the option, not being a date which is more than 180 days earlier than the date of the exercising.

(9) For the purposes of sub-clause (vi) of clause (2) of section 17, the fair market value of any specified security, not being an equity share in a company, on the date on which the option is exercised by the employee, shall be such value as determined by a merchant banker on the specified date.

Explanation.—For the purposes of this sub-rule, “merchant banker” and “specified date” shall have the meanings assigned to them in sub-clause (b) and sub-clause (e) respectively of clause (iv) of sub-rule (8).

(10) This rule shall come into force with effect from the 1st day of April, 2009.

Explanation.—For the purposes of this rule—

 (i)  “accommodation” includes a house, flat, farm house or part thereof, or accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure;

(ii)  “entertainment” includes hospitality of any kind and also, expenditure on business gifts other than free samples of the employers own product with the aim of advertising to the general public;

(iii)  “hotel” includes licensed accommodation in the nature of motel, service apartment or guest house;

(iv)  “member of household” shall include—

(a)  spouse(s),

(b)  children and their spouses,

(c)  parents, and

(d)  servants and dependants;

(v)  “remote area”, for purposes of proviso to this sub-rule means an area that is located at least 40 kilometres away from a town having a population not exceeding 20,000 based on latest published all-India census;

(vi)  “salary” includes the pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever name called from one or more employers, as the case may be, but does not include the following, namely:—

 (a)  dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned;

 (b)  employer’s contribution to the provident fund account of the employee;

 (c)  allowances which are exempted from payment of tax;

 (d)  the value of perquisites specified in clause (2) of section 17 of the Income-tax Act;

 (e)  any payment or expenditure specifically excluded under proviso to sub-clause (iii) of clause (2) or proviso to clause (2) of section 17;

 (f)  lump-sum payments received at the time of termination of service or superannuation or voluntary retirement, like gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and similar payments;

(vii) “maximum outstanding monthly balance” means the aggregate outstanding balance for each loan as on the last day of each month.]

Profit in Lieu of Salary sec. 17(3)

Profit in lieu of salary means any amount received by the employee from the employer due to its employee employer relationship other than normal compensation what he receive from employer.

  • The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or modification of his term of employment
  • Any payment from Unrecognized Provident Fund( URPF) or such other fund to the extent to which it does not consist of contribution by the assessee or interest on such contribution.
  • Any sum received under a keyman insurance policy including the sum allocated by way of bonus on such policy.
  • Any other amount from employer except the following:
    • Gratuity exempted u/s 10(10)
    • House rent allowance
    • Retrenchment compensation
    • Superannuation fund
    • Statutory provident fund or public provident fund
    • Recognized provident fund, if does not include contribution of assessee and interest thereon
    • Keyman insurance policy and bonus
    • Any amount received prior to employment or after the cession of employment

Any received from ex-employer

How to Structure Allowances for Saving Income Tax

There are different categories of allowance based on their taxability .i.e. Exempted, Exempted upon actual expenditure, Fully Taxable, Taxable after specified Limit. One can always plan this salary; so that his/her tax liability can be minimized such as inclusion of Transport allowance of Rs 800/- in salary but care should be take in structuring allowances like only married person having children can get the benefit of children hostel allowances and children education allowances, so unmarried person should not include this type of allowances in their salary. For allowances which are exempted upon actual expenditure one should take care of getting proper invoice/receipt/bill for those services from others to whom payments are made like taking petrol bill for petrol allowances.

A) Fully exempted allowances .i.e. not taxable

  1. Foreign allowances
  2. Allowances to high court or supreme court judges
  3. Allowances paid to high court judge under service act
  4. Allowances from UNO
  5. Overseas allowances

B) Allowances exempted upon actual expenditure

  1. Travelling allowance
  2. Daily allowance
  3. Covance allowance
  4. Helper allowance
  5. Research allowance/academic allowance
  6. Uniform allowance

C) Taxable allowances

  1. Dearness allowance
  2. Fixed medical allowance
  3. Tiffin allowance/lunch allowance
  4. Servant allowance
  5. Project allowance
  6. Family allowance
  7. Special allowance
  8. Petrol allowance
  9. Overtime allowance
  10. City compensatory allowance
  11. Rural allowance

D) Allowances exempted upto specified limit

Allowances

Exemption

  1. Transport allowance

Rs. 800 per month

Rs. 1600 per month for blind & handicapped

  1. Children education allowance

Rs. 100 per month upto two children (not exempt for children studying abroad)

  1. Children hostel allowance

Rs. 200 per month upto two children

  1. Tribal area allowance

Rs. 200 per month

(allowed in MP,TN,UP, Karnataka, Tripura, Assam, west Bengal, Bihar, Orissa)

  1. Transport system allowance

Rs.6000 per month or 70% 0f allowance

(whichever is lower)

  1. Underground allowance

Rs. 800 per mont


Perquisite in Respect of Use of Movable Asset

Valuation of Perquisite in Respect of Use of Movable Asset like computer, laptop, furniture when used by employee for official purpose and private use and Valuation of assets when they are transferred to employee during or post employment at the time of retirement. Sometimes employer gives the assets to employees for personal use and it is considered as perquisite under income tax act as its an added benefit to employee other than normal compensation, which he receive during the normal course of employment.

Only that asset will be taxed which is used for the personal purpose and if that asset is used during the course of employment for fulfilling this duties to employer than it will not be taxed under income tax act, 1961.

There are different categories of asset and taxability depends on the ownership of those assets by employer, if assets are owned by employer than 10% of cost of asset is taxed as perquisite less any amount recovered from employee by employer.

If asset is taken on hire than actual cost of hire will be taxed as perquisite under income tax act less any amount recovered from employee by employer.

Asset owned by employer:

10% of cost of asset

Less: any amount recovered from employer

If positive = perquisite

Asset hired by employer:

Actual hire charges

Less: any amount recovered from employer

If positive = perquisite

Note:

  1. If employer has provided laptop and computer to use then tax free perquisite
  2. Use of movable asset can be used by employer or his house holder member
  3. Calculation will be made for the period for which asset is used by employer

This provision is not applicable to asset which have some specified rules

Valuation of Different Perquisites for Income Tax Calculation

(3) The value of benefit to the employee or any member of his household resulting from the provision by the employer of services of a sweeper, a gardener, a watchman or a personal attendant, shall be the actual cost to the employer. The actual cost in such a case shall be the total amount of salary paid or payable by the employer or any other person on his behalf for such services as reduced by any amount paid by the employee for such services.

(4) The value of the benefit to the employee resulting from the supply of gas, electric energy or water for his household consumption shall be determined as the sum equal to the amount paid on that account by the employer to the agency supplying the gas, electric energy or water. Where such supply is made from resources owned by the employer, without purchasing them from any other outside agency, the value of perquisite would be the manufacturing cost per unit incurred by the employer. Where the employee is paying any amount in respect of such services, the amount so paid shall be deducted from the value so arrived at.

(5) The value of benefit to the employee resulting from the provision of free or concessional educational facilities for any member of his household shall be determined as the sum equal to the amount of expenditure incurred by the employer in that behalf or where the educational institution is itself maintained and owned by the employer or where free educational facilities for such member of employees’ household are allowed in any other educational institution by reason of his being in employment of that employer, the value of the perquisite to the employee shall be determined with reference to the cost of such education in a similar institution in or near the locality. Where any amount is paid or recovered from the employee on that account, the value of benefit shall be reduced by the amount so paid or recovered :

Provided that where the educational institution itself is maintained and owned by the employer and free educational facilities are provided to the children of the employee or where such free educational facilities are provided in any institution by reason of his being in employment of that employer, nothing contained in this sub-rule shall apply if the cost of such education or the value of such benefit per child does not exceed one thousand rupees per month.

(6) The value of any benefit or amenity resulting from the provision by an employer who is engaged in the carriage of passengers or goods, to any employee or to any member of his household for personal or private journey free of cost or at concessional fare, in any conveyance owned, leased or made available by any other arrangement by such employer for the purpose of transport of passengers or goods shall be taken to be the value at which such benefit or amenity is offered by such employer to the public as reduced by the amount, if any, paid by or recovered from the employee for such benefit or amenity :

Provided that nothing contained in this sub-rule shall apply to the employees of an airline or the railways.

(7) In terms of provisions contained in sub-clause (viii) of clause (2) of section 17, the following other benefits or amenities and value thereof shall be determined in the manner provided hereunder:

(i)  The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan for any purpose made available to the employee or any member of his household during the relevant previous year by the employer or any person on his behalf shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India, constituted under the State Bank of India Act, 1955 (23 of 1955), 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 as reduced by the interest, if any, actually paid by him or any such member of his household:

Provided that no value would be charged if such loans are made available for medical treatment in respect of diseases specified in rule 3A of these Rules or where the amount of loans are petty not exceeding in the aggregate twenty thousand rupees:

Provided further that where the benefit relates to the loans made available for medical treatment referred to above, the exemption so provided shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

(ii)  The value of travelling, touring, accommodation and any other expenses paid for or borne or reimbursed by the employer for any holiday availed of by the employee or any member of his household, other than concession or assistance referred to in rule 2B of these rules, shall be determined as the sum equal to the amount of the expenditure incurred by such employer in that behalf. Where such facility is maintained by the employer, and is not available uniformly to all employees, the value of benefit shall be taken to be the value at which such facilities are offered by other agencies to the public. Where the employee is on official tour and the expenses are incurred in respect of any member of his household accompanying him, the amount of expenditure so incurred shall also be a fringe benefit or amenity:

Provided that where any official tour is extended as a vacation, the value of such fringe benefit shall be limited to the expenses incurred in relation to such extended period of stay or vacation. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity.

(iii) The value of free food and non-alcoholic beverages provided by the employer to an employee shall be the amount of expenditure incurred by such employer. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity:

Provided that nothing contained in this clause shall apply to free food and non-alcoholic beverages provided by such employer during working hours at office or business premises or through paid vouchers which are not transferable and usable only at eating joints, to the extent the value thereof either case does not exceed fifty rupees per meal or to tea or snacks provided during working hours or to free food and non-alcoholic beverages during working hours provided in a remote area or an off-shore installation.

(iv) The value of any gift, or voucher, or token in lieu of which such gift may be received by the employee or by member of his household on ceremonial occasions or otherwise from the employer shall be determined as the sum equal to the amount of such gift:

Provided that where the value of such gift, voucher or token, as the case may be, is below five thousand rupees in the aggregate during the previous year, the value of perquisite shall be taken as “nil“.

(v) The amount of expenses including membership fees and annual fees incurred by the employee or any member of his household, which is charged to a credit card (including any add-on-card) provided by the employer, or otherwise, paid for or reimbursed by such employer shall be taken to be the value of perquisite chargeable to tax as reduced by the amount, if any paid or recovered from the employee for such benefit or amenity:

Provided that there shall be no value of such benefit where expenses are incurred wholly and exclusively for official purposes and the following conditions are fulfilled:—

(a)  complete details in respect of such expenditure are maintained by the employer which may, inter alia, include the date of expenditure and the nature of expenditure;

(b)  the employer gives a certificate for such expenditure to the effect that the same was incurred wholly and exclusively for the performance of official duties.

(vi) (A) The value of benefit to the employee resulting from the payment or reimbursement by the employer of any expenditure incurred (including the amount of annual or periodical fee) in a club by him or by a member of his household shall be determined to be the actual amount of expenditure incurred or reimbursed by such employer on that account. The amount so determined shall be reduced by the amount, if any paid or recovered from the employee for such benefit or amenity:

Provided that where the employer has obtained corporate membership of the club and the facility is enjoyed by the employee or any member of his household, the value of perquisite shall not include the initial fee paid for acquiring such corporate membership.

(B) Nothing contained in this clause shall apply if such expenditure is incurred wholly and exclusively for business purposes and the following conditions are fulfilled:—

(a)  complete details in respect of such expenditure are maintained by the employer which may, inter alia, include the date of expenditure, the nature of expenditure and its business expediency;

(b)  the employer gives a certificate for such expenditure to the effect that the same was incurred wholly and exclusively for the performance of official duties.

(C) Nothing contained in this clause shall apply for use of health club, sports and similar facilities provided uniformly to all employees by the employer.

(vii) The value of benefit to the employee resulting from the use by the employee or any member of his household of any movable asset (other than assets already specified in this rule and other than laptops and computers) belonging to the employer or hired by him shall be determined at 10 per cent per annum of the actual cost of such asset or the amount of rent or charge paid or payable by the employer, as the case may be, as reduced by the amount, if any, paid or recovered from the employee for such use.

(viii) The value of benefit to the employee arising from the transfer of any movable asset belonging to the employer directly or indirectly to the employee or any member of his household shall be determined to be the amount representing the actual cost of such assets to the employer as reduced by the cost of normal wear and tear calculated at the rate of 10 per cent of such cost for each completed year during which such asset was put to use by the employer and as further reduced by the amount, if any, paid or recovered from the employee being the consideration for such transfer :

Provided that in the case of computers and electronic items, the normal wear and tear would be calculated at the rate of 50 per cent and in the case of motor cars at the rate of 20 per cent by the reducing balance method.

(ix) The value of any other benefit or amenity, service, right or privilege provided by the employer shall be determined on the basis of cost to the employer under an arm’s length transaction as reduced by the employee’s contribution, if any :

Provided that nothing contained in this clause shall apply to the expenses on telephones including a mobile phone actually incurred on behalf of the employee by the employer.

(8)(i) For the purposes of sub-clause (vi) of clause (2) of section 17, the fair market value of any specified security or sweat equity share, being an equity share in a company, on the date on which the option is exercised by the employee, shall be determined in accordance with the provisions of clause (ii) or clause (iii).

(ii) In a case where, on the date of the exercising of the option, the share in the company is listed on a recognized stock exchange, the fair market value shall be the average of the opening price and closing price of the share on that date on the said stock exchange :

Provided that where, on the date of exercising of the option, the share is listed on more than one recognized stock exchanges, the fair market value shall be the average of opening price and closing price of the share on the recognised stock exchange which records the highest volume of trading in the share :

Provided further that where, on the date of exercising of the option, there is no trading in the share on any recognized stock exchange, the fair market value shall be—

(a)  the closing price of the share on any recognised stock exchange on a date closest to the date of exercising of the option and immediately preceding such date; or

(b)  the closing price of the share on a recognised stock exchange, which records the highest volume of trading in such share, if the closing price, as on the date closest to the date of exercising of the option and immediately preceding such date, is recorded on more than one recognized stock exchange.

(iii) In a case where, on the date of exercising of the option, the share in the company is not listed on a recognised stock exchange, the fair market value shall be such value of the share in the company as determined by a merchant banker on the specified date.

(iv) For the purpose of this sub-rule,—

(a)  “closing price” of a share on a recognised stock exchange on a date shall be the price of the last settlement on such date on such stock exchange :

Provided that where the stock exchange quotes both “buy” and “sell” prices, the closing price shall be the “sell” price of the last settlement;

(b)  “merchant banker” means category I merchant banker registered with Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(c)  “opening price” of a share on a recognised stock exchange on a date shall be the price of the first settlement on such date on such stock exchange :

Provided that where the stock exchange quotes both “buy” and “sell” prices, the opening price shall be the “sell” price of the first settlement;

(d)  “recognised stock exchange” shall have the same meaning assigned to it in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

(e)  “specified date” means,—

(i)  the date of exercising of the option; or

(ii)  any date earlier than the date of the exercising of the option, not being a date which is more than 180 days earlier than the date of the exercising.

(9) For the purposes of sub-clause (vi) of clause (2) of section 17, the fair market value of any specified security, not being an equity share in a company, on the date on which the option is exercised by the employee, shall be such value as determined by a merchant banker on the specified date.

Explanation.—For the purposes of this sub-rule, “merchant banker” and “specified date” shall have the meanings assigned to them in sub-clause (b) and sub-clause (e) respectively of clause (iv) of sub-rule (8).

(10) This rule shall come into force with effect from the 1st day of April, 2009.

Explanation.—For the purposes of this rule—

(i)  “accommodation” includes a house, flat, farm house or part thereof, or accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure;

(ii)  “entertainment” includes hospitality of any kind and also, expenditure on business gifts other than free samples of the employers own product with the aim of advertising to the general public;

(iii)  “hotel” includes licensed accommodation in the nature of motel, service apartment or guest house;

(iv)  “member of household” shall include—

(a)  spouse(s),

(b)  children and their spouses,

(c)  parents, and

(d)  servants and dependants;

(v)  “remote area”, for purposes of proviso to this sub-rule means an area that is located at least 40 kilometres away from a town having a population not exceeding 20,000 based on latest published all-India census;

(vi)  “salary” includes the pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever name called from one or more employers, as the case may be, but does not include the following, namely:—

(a)  dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned;

(b)  employer’s contribution to the provident fund account of the employee;

(c)  allowances which are exempted from payment of tax;

(d)  the value of perquisites specified in clause (2) of section 17 of the Income-tax Act;

(e)  any payment or expenditure specifically excluded under proviso to sub-clause (iii) of clause (2) or proviso to clause (2) of section 17;

(f)  lump-sum payments received at the time of termination of service or superannuation or voluntary retirement, like gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and similar payments;

(vii) “maximum outstanding monthly balance” means the aggregate outstanding balance for each loan as on the last day of each month.

How to Calculate the Cost of Perquisite in Respect of Transfer of Movable Asset

There are different assets which are given by the employer to the employee during the course of the employment to its employees so that it can fulfill his duties and once the work is completed employer has the option of transferring those assets to the employee at the lower cost. Since depreciated value of these asset is higher than what has been recovered from employee for such asset and from income tax perspective it is treated as perquisite and tax is payable on such additional value.

Valuations of these assets are done according to their tenure of use by the company. For Computer and electronic items depreciation of 50% is to be provided for each completed years means 1 year from the day of purchase and value of asset is reduced by 50%. I.e. Cost of asset is Rs 100/- after one year value is reduced by Rs 50/- and at the end of second year it will be reduced by Rs 25/- and at the end of third year it is reduced by Rs 12.5/- and value at the end of third year will be Rs 12.5/- for that asset for calculation of perquisites.

For Motor Car it will be 20% rate WDV (Written Down Value Method) and for any other asset it will 10% SLM (Straight Line Method).

Computer or electronic items

Cost of employer [purchase cost]

Less: 50% of WDV for each completed year [faction ignore]

Less: any mount recovered from employer

If positive = perquisite

Motor car

Cost of employer

Less: 20% of WDV for each completed year [faction ignore]

Less: any mount recovered from employer

If positive = perquisite

Any other asset

Cost of employer

Less: 10% of SLM for each completed year [faction ignore]

Less: any mount recovered from employer

If positive = perquisite