APPBDdiH 1

-=--------a~ -:- -

ASSESSMENT YEARS 2020-21 ANO 2021-22

11 TAX LIABILITY - HOW TO FINO OUT
Tax liability for the assessment years 2020-21 d
an 2021 -22 shall be calculated as follows · -
1. Find out gross total income Rs. Rs.
2. Less: Deductions under sections BOC to BOU -
3. Find out net income [(1) - (2)] -
4. Divide the net income into the following- -
4.1
Income subject to special tax rates mentioned in para 0.1-6
4.2 Remaining income subject to normal rates -
5. Find out income-tax on net income- -
5.1
Tax on income specified in 4.1. (supra) at the rates given in para 0.1-6
5.2 -
Tax on remaining income at the normal rate given in para 0.1-1 or 0.1-2 or 0.1-3 or 0.1-4
or 0.1-5
- -
6. Less: Rebate under section 87A (applicable in the case of a resident individual having net income
not exceeding Rs. 5 lakh)
7. Ineome-tax after rebate under section 87A [(5) - (6)]
-
2
-
8. Add: Surcharge @ 0%, 2%, 5%, 7%, 10%, 12%, 15%, 25% or 37% of (7)
9. Find out the total [(7)+(8)]
-
10. Add: Health and education cess (HEC) (4% of (9)]
-
'•
11. Find out the total [(9) + (10)]
-
12. Deduct : Rebate under section 86, 89, 90, 90A or 91
-
13. Tax liability [(11)-(12)]*
-
14. Add: Interest/ penalty, etc. AMT c edit] -
15. Less: Pre-paid taxes [i.e., advance tax, self-assessment tax, TDS, TCS, MAT/ r -
16. Tax payable [(13) + (14) - (15)] -
Notes :
1. (2) cannot exceed (1). .
2. Surcharge is applicable as a% of income-tax [i.e., (7)].

I I INCOME-TAX ..
0 1 1 , ,.,. a. 'ills. Hindu undivided families, AOPs,
BOl -The tax rates applicable to individuals are also applicable to
. - ,nu1vt u. , . ciation of .persons, a : o dy of individuals or an
. artificial juridical person. The rates
a Hindu undivided farmly, an asso _ and 2021-22 are as follows : ·
applicable for the assessment years 2020 21 . ·

. . um alternate tax. In the case of any other taxpayer, it cannot be less than alternate
• In the case of a corporate-assessee, 1·t cannot be Jess than mnum
lllinimum tax.
863
 Tax rates
ParaO.l
. f at any time during the previous year but of Jess than 8
resident senior citizen who IS at least 60 year~~2~~; (date of birth on or after April 2, 1940 but before A ril Years
onthelastdayoftheprev1ousyear[assessmentyear il 1941 but before April 2, 1961)]- p ,l960)
onorafter Apr 2
or assessment year 2021-22 (dateof birth

-
Surcharge Health and educatio;---
Income-tax ratest cess (HEC)
Net income range
Nil Nil
Up to Rs. 3,00,000 Nil
Nil 4 % of income-tax -
5% of (total income minus

-
Rs. 3,00,000 - Rs.
5,00,000 Rs. 3,00,000)t
Nil 4 % of income-tax
Rs. 5,00,000 - Rs. Rs. 10,000 + 20% of (total
10,00,000 income minus Rs. 5,00,000)
Nil 4 % of income-tax
Rs. 10,00,000 - Rs. Rs. 1,10,000 + 30% of (total
50,00,000 income minus Rs. 10,00,000)
10% of income-tax 4 % of income-tax
Rs. 50,00,000 - Rs. Rs. 13,10,000 + 30% of (total
[see Note 2] and surcharge
1,00,00,000 income minus Rs. 50,00,000)
15% of income-tax 4 % of income-tax and
Rs. 1,00,00,000 - Rs. Rs. 28,10,000 + 30% of (total
[see Note 2] surcharge
2,00,00,000 income minus Rs.1,00,00,000)
25% of income-tax 4 % of income-tax and
Rs. 2,00,00,000 - Rs. Rs. 58,10,000 + 30% of (total
(see Note 2] surcharge
5,00,00,000 income minus Rs. 2,00,00,000)
37% of income-tax 4 % of income-tax and
Above Rs. 1,48,10,000 + 30% of (total
[see'Note 2] surcharge
Rs. 5,00,00,000 income minus Rs. 5,00,00,000)

resident super senior citizen who is 80 years or more at any time during the previous year (assessment year 2020-
21 (date of birth before April 2, 1940) or assessment year 2021-22 (date of birth before April 2, 1941)]-

Income-tax ratest [Link] Health,and education

Net income range ,C(SS (HEC)
Nil Nil
Up to Rs. 5,00,000 Nil
20% of (total income minus Nil 4 % of income-tax
Rs. 5,00,000 - Rs.
10,00,000 Rs. 5,00,000)
Rs. 1,00,000 + 30% of (total Nil 4 % of income-tax
Rs. 10,00,000 - Rs.
50,00,000 income minus Rs. 10,00,000)
Rs. 13,00,000 + 30% of (total 10% of income-tax 4 % of income-tax and
Rs. 50,00,000 - Rs.
income minus Rs. 50,00,000) [see Note 2] surcharge
1,00,00,000
Rs. 28,00,000 + 30% of (total 15 % of income-tax 4 % of income-lax and
Rs. 1,00,00,000 - Rs.
income minus Rs.1,00,00,000) [seeNote2] surcharge
2,00,00,000
Rs. 2,00,00,000 - Rs. Rs. 58,00,000 + 30% of (total 25 % of income-lax 4 % of income-tax and
5,00,00,000 income minus Rs. 2,00,00,000) [seeNote2] surcharge

Above Rs. 5,00,00,000 Rs. 1,48,00,000 + 30% of (total 37% of income-lax 4 % of income-tax and
income minus Rs. 5,00,00,000) [see Note2] surcharge

For any other resident md1v1dual who IS less than 60 years of age on the last day of the previous year [assessment year
2020-21 (date of birth on or after April 2, 1960) o~ as~es~ment year 2021-22 (date of birth on or after April 2, 1961)], any non-
resident md1v1dual, every HUF/ AOP /BO!/ artif!c1al Juridical person-

Net income range Income-tax ratest Surcharge Health and education '>
ces~ (HEC) .'--
\
Up lo Rs. 2,50,000 Nil Nil Nil -
Rs. 2,50,000 - Rs. 5% of (total income minus Nil 4 % of income-tax
5,00,000
Rs. 5,00,000 - Rs.
Rs. 2,50,000)t
Rs. 12,500 + 20% of (total 4 % of income-tax
-
Nil
10,00,000 income minus Rs. 5,00,000)

t It is subject to rebate under section 87A [see Note (infra)].

isee also para 0.1-6.
 - -----------------~I~n~c~om~e::•t~a~v~-----------------~P:::a~r~a'...:0~.1
Net income range In come-tax rntes:j:
Surcharge Health and education
i-:- cess (HEC)
Rs, 10,00,000 - Rs.
~ - l,l 2,500 + 30% of (total
50,00,000 Nil 4% of income-tax
income minus Rs. 10,00,000l
50,00,000 · Rs.
~- 13,12,500 + 30% of (total 4 % of income-tax and
100,00,000 10% of income-tax
,.-!- income minus Rs. 50,00,000)
Rs. 1,00,00,000 Rs. [see Note 2] surcharge
~- 28,12,500 + 30% of (total 4 % of income-tax and
2,00,00,000 15% of income-tax
income minus Rs.1,00,00,000) surcharge
~- 2,00,00,000 - Rs. [see Note 2]
Rs. 58,12,500 + 30% of (total 4 % of income-tax and
5,00,00,000 25% of income-tax
income minus Rs. 2,00,00,000) fsee Note 2] surcharge
Above Rs. 5,00,00,000
Rs. 1,48,12,500 + 30% of (total 37% of income-tax 4 % of income-tax and

-
Notes:
income minus Rs. 5,00,00,000) [see Note 2] surcharge

Rebate under section 87A· A resident individual (whose net income does not exceed Rs. 500,000) can avail rebate u nder
. . . , - ~ff
section 87A. It IS deductible froi:n income-tax before calculating health and education cess. The amount of rebate is P
cent of income-tax or Rs. 12,500, whichever is less.
Surcharge - It is as follows -
Surcharge for the assessment year 2020-21-
Differen t Na ture and quantum of [Link] the assessee Surcharge on amoun t of income- Surcharge 011 amount
sit11atio11s (i.e ., individual, HUF, AOP, BOJ or an artificial tax compµted 011 that part of of illcome-tax computed
1, . juridical person) income which is taxable under on other incomes
sections 111A a11d 112A
Situation 1 Total income (including income under sections
111A and 112A) does not exceed Rs. 50 lakh Nil Nil
Situation 2 Total income (including income under sections
111A and 112A) exceeds Rs. 50 lakh but does
not exceed Rs. 1 crore 10% 10%
Situation 3 Total income (including income under sections
111A and 112A) exceeds Rs. 1 crore but does
not exceed Rs. 2 crore 15% 15%
Situation 4 Total income (excluding income under sections
111A and 112A) exceeds Rs. 2 crore but does
not exceed Rs. 5 crore 15% 25%
Situation 5 Total income (excluding income under sections
lllA and 112A) exceeds Rs. 5 crore 15% 37%
Situation 6 Total income (including income under sections
111A and 112A) exceeds Rs. 2 crore (but it is
not covered by Situation 4 and Situation 5) 15% 15%

Surcharge for the assessment year 2021 22

Different Nature and quantum of income of the_assessee Surcharge on amount of income- · Surcharge on amount
situations . (i.e., individual, HUF, AOP, BOTor an artificia l tax computed on dividend income of income-tax
· ., juridical person) and income which is taxable computed on
under sections 111A and 112A other incomes

Situation 1 . (including dividend income and

Total income . llA and 112A) does
income under sections 1
Nil Nil
not exceed Rs. 50 lakh .
Situation 2 . (' cludin dividend income and
Total income in . l~lA and 112A) exceeds
income under sections
Rs. 50 lakh but does not exceed Rs. 1 crore 10% 10%
 Surcharge 011 amount of income- Surcharge on ,
· Different Nnhlre and quantum of income of tlte asse;ee_
(i.e., individual, HUF, AOP, BOI or an nrli c11l 1
tnx computed on dividend income 0,r· amou
situations and income which is taxable · znco111e.1izx 111
juridical person) ,computed on
under sections 11 ZA and 112A
other income
-----..!_
Situation 3 Total income (including dividend income and

---
income under sections -11 lA and 112A) exceeds
Rs. 1 crore but does not exceed Rs. 2 crore 15%
15%
Situation 4 Total income (excluding dividend income and
income under sections 111A and 112A) exceeds

Situation 5
Rs. 2 crore but does not exceed Rs. 5 crore
Total income (excluding dividend income and
income under sections 111A and 112A) exceeds
Rs. 5 crore
15%

15%
25%

37%
---
Situation 6 Total income (including dividend income and
income under sections 111A and 112A) exceeds
Rs. 2 crore (but it is not covered by Situation 4
----
and Situation 5) 15% 15%
Notes -
1. Where the total income includes any income chargeable under section 111A and section 112A (and dividend income for
the assessment year 2021-22), the rate of surcharge on the amount of income-tax computed on that part of income shall not
exceed 15 per cent. ·
2. Surcharge is subject to a marginal relief. If net income exceeds Rs. 50 lakh, the amount payable as income-tax and surcharge
shall not exceed the total amount payable as income-tax on total income of Rs. 50 lakh by more than the amount of income
that exceeds Rs. 50 lakh. Moreover, if net income is in the range of Rs. 1 crore - Rs. 2 crore, the amount payable as income-
tax and surcharge shall not exceed the total amount payable as inco1:1e-ta~ and su_rcharge on total income of Rs. 1 crore by
more than the amount of income that exceeds Rs. 1 crore. Similarly, if net mcome 1s m the range of Rs. 2 crore - Rs. 5 crore,
the amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax and surcharge
on total income of Rs. 2 crore by more than the amount of income that exceeds Rs. 2 crore. Likewise, if net income is above
Rs. 5 crore, the amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax and
surcharge on total income of Rs. 5 crore by more than the amount of income that exceeds Rs. 5 crore.
3. It has been clarified by CBDT that the derivatives (future and options) are not treated as capital assets and the income
arising from the transfer of the derivatives is treated as business income and liable for normal rate of tax (and such case will
fall in the 4th column of the above tables). However, in the case of Foreign Institutional Investors (FPI), the derivatives are
treated as capital assets and the gains arising from the transfer of the same is treated as capital gains and subject to a special
as
rate of tax per the provisions of section 115AD. Consequently, surcharge on income-tax payable on gains arising from
the transfer of derivatives (future and options) by FPI which are liable to special rate of tax under section 115AD, cannot
exceed 15 per cent (it will fall under _3 rd column of the aforesaid tables).
Health and education cess (HEC) - It is 4 per cent of income-tax and surcharge.
Alternate minimum tax· Tax payable by a non-corporate assessee cannot be less than 18.5 per centt (+SC+ HEC) of" adjusted
total income" as per section 115JC
Alternative tax regime - An individual/HUF can opt for alternative tax regime under section 115BAC for the assessment
year 2021-22 [see para 194.3].
0.1-2 Firms- A firm is taxable at the rate of 30 per cent for the assessment years 2020-21 and 2021-22 [see also para 0.1-6].
Surchar~e - Surcharge is 12 per cent of income-tax if net income exceeds Rs. 1 crore. It is subject to marginal relief (in the
case of a firm havmg a net m~ome exceedmg Rs. 1_ crore, the amount payable as income tax and surcharge shall not exceed
the total amount payable as mcome-tax on total mcome of Rs. 1 crore by more than the amount of income that exceeds
Rs. 1 crore).
Health and education cess - It is 4 per cent of income-tax and surcharge.
Alternate_ minimum tax -Tax payable by firm cannot be less than 18.5 per centt [+SC+ HEC] of "ad'usted total income"
as per section 115JC. J

t 9 per cent, if the assessee is a unit located in an International Financial Serv· C "bl foreign
exchange. ices entre and derives its income solely in convertI e
STEPS to be followed to COMPUTE
RESIDENTIAL STATUS

Check if he / If yes, R&OR

she fulfills BOTH
he / she is a
RESIDENTIAL STATUS:

If YES, the
Steps to compute

RESIDENT
ADDITIONAL
Check if he / CONDITIONS If No, R But
she fulfills ANY NOR
ONE of the If BOTH the
BASIC BASIC
CONDITIONS he / she is a
CONDITIONS
NON-RESIDENT
are not
fulfilled,
BASIC CONDITIONS

Basic Condition OR Basic Condition

1 2
A. PRESENCE / STAY in
INDIA for ATLEAST 60 Days
during the R.P.Y.
PRESENCE / STAY in INDIA
for ATLEAST 182 Days AND
during the R.P.Y.
B. PRESENCE / STAY in INDIA
for ATLEAST 365 Days during
4 P.Y.s immediately
preceding the R.P.Y.
ADDITIONAL CONDITIONS

Additional Additional
Condition 1 Condition 2
•RESIDENT for at •PRESENCE / STAY
least 2 [Link]. out of in INDIA for
10 [Link]. AND ATLEAST 730 Days
immediately during 7 P.Y.s
preceding the immediately
R.P.Y. preceding the
R.P.Y.
SCOPE OF INCOME u/s 5:
FOREIGN
INDIAN INCOME
INCOME
Income Received / Deemed to be
received in India AND Accrues / Arises
/ Deemed to Accrue or Arise IN India; Income that is not INDIAN Income is
or Foreign Income.

Income Received / Deemed to be

received in India BUT Accrues / Arises /
Deemed to Accrue or Arise OUTSIDE
India; or
Income NOT Received / NOT Deemed
Income Received / Deemed to be to be received in India AND DOES NOT
received OUTSIDE India BUT Accrues / Accrues / Arises / Deemed to Accrue
Arises / Deemed to Accrue or Arise IN or Arise IN India.
India
RELATIONSHIP BETWEEN SCOPE OF INCOME
AND RESIDENTIAL STATUS:
Always taxable in
R&OR:
India
SCOPE OF INCOME

INDIAN INCOME Always taxable in

R But NOR:
Of: India

Always taxable in
Non-Resident:
India

Always taxable in
R&OR:
India

FOREIGN INCOME NOT Taxable in India

R But NOR:
Of: (2 exceptions)

Non- Resident: NOT Taxable in India

Summing up of Tax Incidence
■ Global Income of R&OR is taxable in India. Meaning thereby, Indian Income
and Foreign Income of R&OR are taxable in India.
■ For R But NOR, Indian Income is taxable in India and Foreign income is NOT
Taxable in India. However, the following foreign incomes are taxable in the
hands of R But NOR in India: -
– Business Income and business is controlled wholly or partly from India, or
– Professional Income from a profession set-up in India.
■ For Non-Resident (NR) - ONLY Indian Income is taxable in India. Meaning
thereby, Foreign income of NR is NOT Taxable in India under any circumstances.
 Different forms of salary Para 41
73

Rs. Rs.
Less : Deduction under section 16
Entertainment allowance [see para 42.2]

-- .....
··················
Professional tax [see para 45.3] ············•""''
Income from salaries ......

DIFFERENT FORMS OF SALARY - HOW TAXED

41. The term "salary" signifies a recompense or consideration given to any person for pains bestowed upon
another person's business. ·
Tax treatment of different receipts is given below -
Different receipts " C ---·t,.
J '¾ "
Tqx ,treatment ' .. , ... h,.J!ft0 , ~" " • 'iii' y

Basic salary Taxable.

Dearness allowance/pay Taxable.
Advance salary Taxable in the year of receipt.
Arrears of salary Taxable in the year of receipt, if not taxed on due basis earlier.
Leave encashment while in service Taxable
Leave encashment at the time of Exempt in the hands of a Government employee*. In the case of a non-
retirement or at the time of leaving job. Government employee*, it is exempt in some cases [see para 41.1]
Salary in lieu of notice Taxable
Salary to partner Not chargeable under the head "Salaries" but taxable under the head
"Profits and gains of business or profession".
Fees and commission Taxable.
Bonus Taxable on receipt basis if not taxed earlier on due basis.
Gratuity Exempt in the hands of a Government employee*. In the case of a non-
Government employee*, it is exempt in some cases [see para 41.2]
Monthly pension (i.e., uncommuted Taxable
pension)
Lump sum paYII).ent of pension (i.e., Exempt in the hands of a Government employee*. In the case of a non-
commuted pension) Government employee*, it is exempt in some cases [see para 41.3]
Pension under National Pension Scheme At the time of receipt of pension it is chargeable to tax. Tax consequences
(NPS) are discussed in para 41.4.
Annuity from employer Taxable as salary.
Annual accretion to the credit balance in 1. Excess of employer's contribution over 12% of salary is taxable.
recognized provident fund 2. Excess of interest over notified interest is taxable (notified rate of interest
is 9.5 per cent).
Retrenchment compensation Exempt from tax to the extent of leastt of the following:
a. Amount calculated** under section 25F(b) of the Industrial Disputes
Act; or
b. An amount specified by the Government (i.e., Rs. 5,00,000).
Remuneration for extra duties Fully taxable.
Compensation received under voluntary Exempt in some cases [see para 41.5]
retirement scheme (VRS)
Profits in lieu of salary Taxable [see para 41.6]
Salary from UNO Not chargeab!e to tax.

*See next page

**See next page
tWhen compensation is paid under any scheme approved by the Central Government, these limits are not applicable and the entire amount is
ex"mpt. ·
~U I
- - - - - - - . . : __ _ _ _~In~c~o~m~e~.un~d!.er~th~e~h~e~a~d~'~S~a~la~rl~e~s__:'a~n~d~it!s~c~o~m'.!p::u:la::l:o::n::.....__________

4. Any payment from unrecognised provident fund or such other fund to the extent to whic;:h it does not consist
of contributions by the assessee or interest on such contributions.
5 · ~y sum received under a Keyman insurance policy including the sum allocated by way of bonus on such
policy.
6. Any amount received (in lump sum or otherwise) prior to employment or after cessation of employment.

DIFFERENT FORMS OF ALLOWANCES - HOW TAXED

42 - Allowance is generally defined as a fixed quantity of money or other subst~ce given r_egularly in addition
to salary for the purpose of meeting some particular requirement connected with the services ~endered by the
employee or as compensation for unusual conditions of that service. It is fixed, pre-determmed and given
irre_s p~tive of actual expenditure. Under the Act, it is taxable under section 15 on "due" or "receipt" basis,
whi~hever comes earlier, irrespective of the fact that it is paid in addition to or in lieu of salary. Tax treatment
of different allowances is given below :
Different allowances -
City compensatory allowance
Tax treatment - -·
Taxable
House rent allowance Exempt in some cases [see para 42.1.J
Entertainment allowance Deductible in some cases [see para 42.2)
Special all<,>wance Notified special allowances are exempt (see para 42.3)
Foreign allowance Exempt from tax if paid outside India by the Government to an
Indian citizen for rendering service outside India
Tiffin allowance, fixed medical allowance and Taxable
servant allowance
Allowance to High Court Judges Not taxable
Allowance from United Nations Organisation Not taxable
Compensatory allowance under article 222(2) of Not taxable
the Constitution
Sumptuary allowance to serving Chairman/ Not chargeable to tax for the assessment years 2008-09 to
members of UPSC 2020-21
Allowance to retired Chairman and retired An allowance (subject to a maximum of Rs. 14,000 per month)
members of UPSC for defraying the service of an orderly and for meeting expenses
incurred towards secretarial assistance on contract basis, is not
chargeable to tax for the assessment years 2008-09 to 2020-21
Any other allowance Taxable

42.1 House rent allowance [Sec. 10{13A} and rule 2AJ - Exemption in respect of house rent allowance is
regulated by rule 2A It is based upon the following-
1. An amount equal to 50 percent of salary, where residential house is situated at Bombay, Calcutta, Delhi or Madras
and an amount equal to 40 per cent of salary where residential house is situated at any other place.
2. House rent allowance received by the employee in respect of the period during which rental accommodation is
occupied by the employee during the previous year.
3. The ex cess of rent paid over 10 per cent of salary.

Amuunt exempt from tax • The least of the above three is exempt from tax.
42.1-1 OTHER POINTS - The following other points should also be kept in view:
What is "salary" - "Salary" for this purpose means basic salary and includes dearness allowance if terms of
employment so provide.* It also includes commission based on fixed percentage of turnover achieved by an
employee as per terms of contract of employment- But it does not include any other allowance and perquisite.
·"Salary" shall be determined on "due" basis· Basic salary, dearness allowance and commission are determined
on" due" basis in respect of the period during which rental accommodation is occupied by the employee in the
previous year [Explanation (ii) to rule 2A). It, therefore, follows that salary of a period, other than the previous

*Dearness allowance/ pay shall be considered only when it is part of salary for computing all retirement benefits (like provident fund, pension,
leave encashment, gratuity, etc.). If dearness allow'!flce/ pay is part of salary for computing only some (not all) of the retirement benefits, then
it is not taken into consideration for this purpose.
87
House rent allowance Para 42.1
year,isnotconsideredeventhoughs h · · · "
• Lik .
b as1s. uc amount1srece1veddunngthepreviousyearandistaxableon receipt"
ew1se, sa1ary of the period d · hi h ·
• 1 ft t f th af . computations.
unng w c rented accommodation is not occupied in the previous year,
1s e ou o e oresa1d
When exemption is not available - Exem ti · d · d h · · · ·
for w hich h e d oes not pay any rent o P on 1s erue w ere an employee hves m his own house, or m a house
hi h d
.. r pays rent w c oes not exceed 10 per cent of salary.
Mode of computation o• exemption - The t f · · ·
1 amoun o exemption m respect of house rent allowance received by an
employee depends upon the following -
a. "salary" of the employee ;
b. house rent allowance;
c. rent paid ; and
d. the place where house is taken on rent.
When these four are sa~e through?ut the previous year, the exemption should be calculated on" annual" basis.
When, however, there is a change m respect of any of the aforesaid factors then the exemption shall be worked
out on "monthly" basis. '

Problems - - - - - - -- - -- - - - - - - - - - - - - - -- - - - -- -
42-l- Pl X, wlzo resides in Mi!dras, gets Rs. 3,00,000 per annum as basic salan;. He receives Rs. 50,000 per annum as house
rent allowance. Rent pnzd by him zs Rs. 40,000 per annum. Find out the amount of taxable house rent allowancefor the assessment year
2020-21.

Solution : Out of Rs. 50,000 received as house rent allowance, the least of the following will be exempt from tax :
a. Rs. 1,50,000 (being 50% of salary) ;
b. Rs. 50,000 (being the house rent allowance received) ; or
c. Rs. 10,000 (being the excess of rent paid over 10% of salary, i.e., Rs. 40,000 - Rs. 30,000).
Rs. 10,000 (being the least of the three) is exempt from tax. The balance of Rs. 40,000 (i.e., Rs. 50,000 -Rs. 10,000) will be
chargeable to tax. .

42.1-£1 [P4.33]"X, who resides in Poona, gets Rs. 2,00, 000 per annum as basi,c salary. He receivrs Rs. 55,000 per annum as house ·
rent allowance, t/wuglz lze pays Rs. 50,000 per annum a~ house rent, Dete~mine the-amount of house rent allowance chargeable to
tax for tire assessmen t year 2020-21. · ;;:

42.l-P2 X, a resident of Ajmer, receives Rs. 1,92,000 per annum as basic salary during the previous year 2019-20. In addition, he gets
Rs. 19,200 per annum as dearness allowance forming part ofbasic salary for computation ofall retirement benefits, 7 per cent commission
on sales made by him (sale made by X during the relevant previous year is Rs. 86,000)and Rs. 24,000perannum as house rent allowance.
He, however, pays Rs. 21,500 per annum as house rent. Determine the quantum of house rent allowance exempt from tax.
Solution : "Salary", for the purpose of computing house rent allowance exempt from tax, works out to be~- 2,17,220 (i.e.,
basic salary: Rs. 1,92,000 + dearness allowance: Rs. 19,200 +commission@ 7% on Rs. 86,000 : Rs. 6,020).
Out of the house rent allowance of Rs. 24,000, the least of the following is exempt from tax:
a. Rs. 86,888 (being 40% of salary) ;
b. Rs. 24,000 (being the amount of house rent allowance) ; or
c. Nil [being the _excess of rent paid (i.e., Rs. 21,500) over 10% of salary (i.e., Rs. 21,722)].
As the least of the three sums is nil, the entire house rent allowance is chargeable to tax.
42.1-£2 [P4.35]*X, a resident ofMandi, teceives Rs. 3,80,000per nnnum as basicsalan;. In addition, he gets Rs. 30, 000 per annum
as dearness allowance, wlzich forms part ofbasii: salary for complltingpension (bu t not gratuity), 4 per cent conn~ission on turnover
achieved by him (turnover achieved ht; him during the relevant previous year 2019-20 is Rs. 60,00,000) and Rs. 60,000 per annum
as house rent allowance. He, however, pays Rs. 70,000 per annum as house rent. Detennine the quantum of house rent alluwance
exempt from tax.
42.1-P3 Xis an employee of AB Insurance Co. Ltd. During tlze previous year 2019-20, he gets Rs. 80,000 per month as salary and
Rs. 10,000 per month as dearness allowance_ (40 per cent of dearness ~llowance is considered for calculating providen_t fund ~t only 30
per cent is considered for calculating gratuity). He gets Rs. 55,000 per month as house rent allowance. X res_zdes with his Jotnt fan'. 1/y
t J 30 20l9 for which no rent 1s paid. From July 1, 2019, he takes a house on rent (monthly rent being Rs. 10,000) at Nozda.
':fO::ev~;e he ~hifts to Delhi with effect from January 1, 2020 (monthly rent being Rs. 53,000). Find out the house rent allowance
chargeable to tax for the assessnzent year 2020-21 ·
S I t' . "Sal ,, for the purpose of computirtg house rent allowance exemption shall be Rs. 83,000 per month
8~~~00 + 30 ;:,i:f dearness allowance which is considered for calculating all retirement benefits). Exemption shall be
calculated as follows -
*Th . . kets re resents a similar solved Problem No. of another book entitled "Students' Guide to Income-tax. Probiems &
e ~umber given m br~~
Solulions", July 2020 edition. s
Thip book includes many more solved problems focusing on contemporary issues.
 Para 42.3
Income under 1he head 'Salaries' and lls compulallon

c. Rs. 8,500, being the entertainment allowance granted during the previous year. .
- 90

Therefore, in this case, Rs 5,000 (being the least of the three sums) is deductible from salary mcome.
42.2-El fP4.38]' X, a11 officer of the P1111jab Govem111e11t, gets Rs. 40,000 per month as salanJ and Rs., 600 per mo_ntl, as
c11tcrtni11111e11t allowance. Besides, he gets deamess allo11xmce a11d house rent allowance as per the Goveri!ment s mies. Dunng the
relem11t previo11s year, he /UIS utilised the e11tire e11lertainme11t allowa11ce for private purpose. Tire _Assessmg Officer is, t/rerefore, of
the 11iew that the e11tertai1m1e11t allowance is fully taxable. Is he legally correct? If 11ot, delem1111e the amoimt of entertmnn,cnt
allo1,x111ce deductiblefro m sn/an;.
42.3 Special allowances prescribed as exempt under section 10(14) -The provisions of section 10(14) are
given below :
42.3-1 WHEN EXEMPTION DEPENDS UPON ACTUAL EXPENDITURE BY THE EMPLOYEE- The following allowances are exempt
under section 10(14) to the extent the amount is utilised for the specified purpose for which the ~llowance is
received. In other words, in the cases given below the amount of exemption under section 10(14) 1s -
a. the amount of the allowance ; or
b. the amount utilised for the specific purpose for which allowance is given,
whichever is lower.
Exell\ption is available on the aforesaid basis in the case of the followin_g allowances -
Name ofallowance Nature of allowa11ce
Travelling allow- Any allowance (by whatever name called) granted to meet the cost of travel on tour or on transfer
ance/ transfer (including any sum paid in connection with transfer, packing and transportation of personal
allowance effects on such transfer).
Conveyance Conveyance allowance granted to meet the expenditure on conveyance in performance of duties
allowance of an office (it may be noted that expenditure for covering the journey between office and residence
is not treated as expenditure in performance of duties of the office and, consequently, such
expenditure is not exempt from tax).
Daily allowance Any allowance whether granted on tour or for the period of journey in connection with transfer,
to meet the ordinary daily charges incurred by an employee on account of absence from his normal
place of duty. .
Helper allow- Any allowance (by whatever name called) to meet the expenditure on a helper where such helper
ance is engaged for the performance of official duties.
Research allow- Any allowance (by whatever name called) granted for encouraging the academic research and
ance other professional pursuits.
Uniform Any allowance (by whatever name called) to meet the expenditure on the purchase or maintenance
allowance of uniform for wear during the performance of duties of an office.
Note: As stated earlier, the amount of exemption in the above cases is amount of allowance or the expenditure incurred for
[Link] purpose for which allowance is given, whichever is lower.
Provisions illustrated
During the previous year 2019-20, the following allowances are given to X by the employer company-
Nahtre ofallowance Amount of Amount actually ~ t Ai11ount
allowance for the purpose given chargeable
' , L in colunm 1 11 , I /o fax
Rs. Rs. ll/1 ' Rs.
Travelling allowance for official purposes 36,000 32,000 4,000
Transfer allowance given at the time of transfer of Xfrom

j Delhi to Ajmer
Conveyance allowance for official purposes
Helper allowance for engaging helper for official purposes
40,000
50,000
68,000
41,000
42,000
64,000
Nil
8,000
4,000
Research allowance 1,00,000 90,000 10,000
Uniform allowance for official purposes 18,000 17,000 1,000
4i.3-2 WHEN EXEMPTION DOES NOT DEPEND UPON EXPENDITURE. In the cases ve b l
does not dep~nd upon expenditure incurred by the employee. Regardfess ~f ;h:w, the amount of e~emption
allowances given below are exempt to the extent of _ amount of expenditure, the

I 'The number given in brackets represents a similar solved Problem No of another book entitl d "S
Solutions", July 2020 edition. This book includes many more solved [Link] ' .
,
e ludent•. Guide lo Income-tax. Problems &
ems ,ocusmg on contemporary ISsues.•

SJ ,••
2 j§!] a
91
Special allowances exempt u/s 10(14) Para 42.3
n. the amount of allowance; or
b. the amount specified in rule 2BB
whichever is lower. '
On the above basis exemption · ·1 bl · th • d th · h
' is ava1 a em e case of the following allowances. It may be note at mt ese
cases, the amount of actual expenditure is not taken into consideration-
Nnmeof
nllowance Nnture of nllowdnce Exe111ptio11 ns specified
iu nile 2BB
Special
Compensatory It includes any special compensatory allowance in the nature of spe- Amount exempt from tax
(Hill Areas) cial compensatory (hilly areas) allowance or high altitude allowance varies from Rs. 300 per
Allowance or uncongenial climate allowance or snow bound area allowance or month to Rs. 7,000 per
avalanche allowance.
Border area month
allowance It includes any special compensatory allowance in the nature of border The amount of exemption
area allowance or remote locality allowance or difficult area allowance varies from Rs. 200 per
or disturbed area allowance.
month to Rs. 1,300 per
month
Tribal areas/
scheduled areas Tribal areas allowance is given in (n) Madhya Pradesh; (b) Tamil Rs. 200 per month
allowance Nadu; (c) Uttar Pradesh; (d) Karnataka; (e) Tripura; /j) Assam;
(g) West Bengal; (Ii) Bihar; (i) Orissa.
Allowance
for transport It is an allowance granted to an employee working in any transport The amount of exemption
system to meet his personal expenditure during his duty performed is-
employees
m the course of running of such transport from one place to another n. 70 per cent of such
place provided that such employee is not in receipt of daily allowance. allowance; or
b. Rs. 10,000 per month,
whichever is lower.
,,.kfu!dren This allowance is given for children's education in India
' ' education The amount exempt is
allowance limited to Rs. 100 per
month per child up to a
maximum of two children .
..ft6stel This allowance is granted to an employee to meet the hostel expendi- It is exempt from tax to
'-- expenditure ture in India on his child.
allowance the extent of Rs. 300 per
month per child up to a
maximum of two children.
Compensatory If this exemption is taken, the same employee cannot claim any exe-
field area Exemption is limited to
mption in respect of border area allowance mentioned above. Rs. 2,600 per month in
'allowance
some cases.
Compensatory If this exemption is taken, the same employee cannot claim any exe- Exemption is limited to
modified mption in respect of border area allowance mentioned above. Rs. 1,000 per month in
area allowance some cases.
Counter It includes any special allowance in the nature of counter-insurgency Exemption is limited to
insurgency allowance granted to the members of armed forces operating in areas Rs. 3,900 per month in
allowance away from their permanent locations. If this exemption is taken, the some cases.
same employee cannot claim any exemption in respect of border area
allowance mentioned above.
-~ Transport Transport allowance gr"!'ted to an employee to meet _his e~penditure
allowance for the purpose of commuting between the place of his residence and
the place of his duty -
- In the case of an employee who is blind or deaf and dumb or Rs. 3,200 per month
orthopaedically handicapped
- In the case of any other employeet Nil
Underground Underground allowance i~ gran!ed to an [Link] is working in Exemption is limited to
allowance uncongenial, unnatural chmate m underground mmes. Rs. 800 per month.
High altitude It is granted to the members of armed forces operating in high alti- It is exemptfrom tax up to
allowance tude areas. Rs. 1,060 per month (for
altitude of 9,000 to 15,000
feet)orRs.1,600permonth
(for altitude above 15,000
feet).

t In the case of Chairman/members of UPSC, transport allowance is not chargeable to tax (without any monetary ceiling) by virtue of section
10(45) for the assessment years 2008-0 9 to 2020-21 ·