By:

Dr. Suman Ramapati

Chapter outline;

• Introduction of Direct taxes

• Residential status
• Income under the head ‘Salaries’
Introduction
•Taxes are levied by governments on their citizens
to generate income for undertaking projects to
boost the economy of the country and to raise the
standard of living of its citizens.
A compulsory
•The authority of the government to levy taxes in contribution to state
India is derived from the Constitution of India, revenue, levied by
which allocates the power to levy taxes to the the government on
Central and State governments. workers' income and
•All taxes levied within India need to be backed business profits, or
by an accompanying law passed by the added to the cost of
Parliament or the State Legislature. some goods,
services, and
transactions.
History of income tax in India

• In the year 1860, the tax was first introduced in India by Sir James Wilson with the

intention to meet the losses sustained by the government due to the Military Mutiny of

1857.

• In the year 1918, a new income tax has been passed and again it was substituted by

another new act which was passed in 1922.

• This Act remained in operation up to the assessment year 1961-62 with several

amendments.

• In discussion with the Ministry of Law finally the Income Tax Act, 1961 has been passed.

The Income Tax Act 1961 was brought into force from 1st April 1962.
What is Assessee?

An Assessee is a person who has paid any tax, has or had any obligation
to pay any tax.

What is Taxation?
Taxation is one of the mode used by the government to finance their
expenditure by imposing charges on citizens and corporate entities.
Taxes are levied in almost every country of the world, primarily to raise
revenue for government expenditures.
How many heads are there under total income?

Heads of
Income

Income Profits and Income Income

Income from from house gains of from Capital from other
salary property business or gains sources
profession
Income from
Income from This is when you Income from sale savings bank
salary and This is rental are self- of a capital asset account
pension are income mostly employed, work such as mutual interest, fixed
covered under as a freelancer or funds, shares, deposits,
here contractor, or you house property winning lottery.
run a business.
 Capital gain means the profit
earned from the sale of an asset.
What do you understand by
When the Capital Asset is being dissolution of firm?
sold or transferred, the profit or
gains arising out of it or you can Dissolution of firm means assets of firm are

term that as the difference between realized and liabilities are paid off and the surplus,

the actual price at which the asset if any is distributed among the partners according

was acquired and the price at which to their right. It is to be noted that ‘dissolution of

it is sold or transferred. Firm’ involves dissolution of partnership but

dissolution of partnership may not lead to
dissolution of firm.

What is
What is TDS?
capital gain?

TDS stands for tax deducted at source. It is tax which is deducted on

source of income. As per the Income Tax Act, any company or person
making a payment is required to deduct tax at source if the payment
exceeds certain threshold limits.
TDS is deducted on the following types of payments:
1) Salaries
2) Interest payments by banks
3) Commission payments
4) Rent payments
5) Consultation fees
6) Professional fees

Education Cess Rate

For the education cess the rate is 2% of the tax payable and for the Secondary and Higher Education
Cess the rate is 1% of the tax payable. Together they form the education cess rate of 3% of the tax
payable.
Direct tax
A tax which is borne and paid directly by a person on whom it is
imposed is a direct tax.

e.g. income tax, wealth tax etc.

It is directly paid by the tax payer to the govt. without any

intermediary and it comes from his own pocket.
Indirect tax

If a tax is passed on by the tax payer to some other person, it is

an indirect tax.

e.g. sales tax, value added tax (VAT).

It is not paid directly by the person on whom it is levied, but it is

paid indirectly through the medium of other persons.
 DIFFERENCES BETWEEN DIRECT AND INDIRECT TAX
Context Direct Tax Indirect Tax
1. Imposed on Income and profits All the goods and
services
2. Who pays Individuals and businesses End-consumers
3. How much Depends on income and Same for everyone
profits
4. Transferability Not transferable Transferable
5. Tax Evasion Possible Not possible
6. Nature Progressive Regressive
7. Collections Complex Convenient
8. Common Income tax and securities GST, excise duty, and
examples transaction tax VAT
TAX RATES

The normal tax rates applicable to a resident individual will depend on the age of
the individual. However, in case of a non-resident individual the tax rates will be
same irrespective of his age. For the purpose of ascertainment of the applicable tax
slab, an individual can be classified as follows:
• Resident individual below the age of 60 years.
• Resident individual of the age of 60 years or above at any time during the year
but below the age of 80 years.
• Resident individual of the age of 80 years or above at any time during the year.
• Non-resident individual irrespective of the age.
Surcharge: Surcharge is levied on the amount of income-tax at following rates if total income of
an assessee exceeds specified limits:-

The maximum rate of surcharge on tax payable on such incomes shall be 15%.
Residential status of an assesse
• The tax liability of an assessee is determined on the basis of his residence in India
during the previous year.
• If an assessee is a non-resident in India, no income- tax is charged on his foreign
incomes.
• It must be remembered that residence of a person is different from his nationality or
domicile.
• He may be an Indian national, but may not be resident in India.
• He may be a British national, but he may be a resident in India.
• As the income of the previous year is assessed during the current assessment year, it is
the residential status of the previous year, that is to be determined.
• If a person is an ordinary resident, all his incomes whether arising in India or outside
India, would be taxable in India.
• But if a person is a non-resident his income arising in India only is taxable and that
arising outside India is not taxable.
CLASSIFICATION OF ASSESSEES ON THE BASIS OF RESIDENTIAL STATUS

According to Section 5 the assesses are divided into 3 residence;

1. Resident (and ordinarily resident)
2. Resident but not ordinarily resident
3. Non-resident Assessee

Resident Non-resident

Resident & Resident but

ordinarily not ordinarily
resident resident
Previous & assessment year

1-4-2021 31-3-2022

Previous year 1-4-2022 31-3-2023

2021-2022

Assessment year
2022-2023
CLASSIFICATION OF ASSESSEES ON THE BASIS OF RESIDENTIAL STATUS
(Continue ………………..)

Resident but not ordinarily resident Resident & ordinarily resident

He is in India during the previous year, for a Resident in India in at least 2 years out of 10
period of 182 days or more; or years preceding to the relevant previous
year. And

He is in India for a total period of 60 days or Stay in India for a total period of 730 days or
more during the relevant previous year and more during 7 years immediately preceding
for 365 days or more during 4 years to the relevant previous year.
immediately preceding the relevant previous
year.
CLASSIFICATION OF ASSESSEES ON THE BASIS OF RESIDENTIAL STATUS
(Continue ………………..)

It may be noted that various tests of the residence are to be applied with reference to
previous year and not the assessment year.
The following entities are made for determining the residential status of an assessee :
(A)An Individual.
(B)A Hindu Undivided Family.
(C)A firms or an Association of Persons (AOP) or a Body of Individuals (BOI).
(D)A company
(E)Every other Person.
Illustration: 1
Shri Ashok Mehta, an Indian citizen, is employed in the USA for the last 15 years. He
returned to India on 1st July, 2010 to attend a marriage function and stayed in India upto
30th April, 2011.Determine his residential status for the assessment year 2011-12.
Solution:
For the assessment year 201 1-'12 his previous year is 2010 - 11. His residential status
will be determined as under :

Calculation of days : July, 2010 31 Dec. 31

Aug. 31 Jan, 2011 31
Sept. 30 Feb. 28
Oct. 31 March 31
Nov. 30 274
Conditions for Resident Stay in India Whether the
condition is
fulfilled
(1) Has he stayed in India for 182 days during From 1st July,2010 to 31st ‘Yes’
the previous year 2010-2011? March, 2011
Total days --- 274

(2) Has he stayed in India for 182 days during Has stayed in India for 182 ‘No’
the previous year and for 365 days during 4 days during the previous year,
years preceding the previous year? but not for 365 days during
(this condition has become non-functional for the preceding 4 years.
an Indian citizen who comes to India on a visit).
Illustration: 2

The previous year of Mr. Smart (foreign citizen) is the financial year 2010-'11. On inquiry
it is found that he was physically present in India from 14th November 2010 to 31st
December, 2010 (both days inclusive). He was also physically present in India for 385
days during the preceding previous years 2006-'07 to 2009-10.
What will be his residential status for the assessment year 2011-12? Give reasons for
your answer.

Solution:
For the assessment year 201 1-'12 his previous year is the financial year 2010 - 11.
Conditions for Resident Stay in India Whether the
condition is
fulfilled
(1) Was he present in India for 182 Nov. 2010 17 ‘No’
days during P.Y. 2011-11? Dec., 2010 31
Total days = 48

(2) Was he present for 60 days during Present only for 48 days in the P.Y. ‘No’
2011-11 and for 365 days during and for 385 days during preceding 4
preceding 4 years? years.

As Mr. Smart does not fulfill any of the two basic conditions, his residential status will be that of a
‘Non-resident.’
Illustration: 3

From the following information find out the residential status of “Mr. Viru” for the assessment year 2010-
12.
Date of arrival in India Date of departure from India
20-04-2006 1-7-2007
1-1-2008 16-5-2008
12-1-2010 13-3-2011

Solution:
Previous year : 2010-11 (1-4-2010 to 31-3-2011)
Assessment year 2011-12

Calculation of days:

1) P.Y : 2006-'07 : During 1-4-2006 to 31-3-2007

From 20-4-2006 to 31-3-2007
(11+31+30+31+31+30+31+30+31+31 + 28 + 31) = Total 346 days
2) P. Y. : 2007-'08 : During 1-4-2007 to 31-3-2008
From 1-4-2007 to 1-7-2007
(30 + 31 + 30 + 1) = 92 days
1-1-2008 to 31-3-2008 :
(31 +29 + 31) = 91 days
Total 183 days
3) P. Y. : 2008-'09 : During 1-4-'08 to 31-3-'09 :
Only from 1-4-'08 to 16-5-'08 (30 + 16) = 46 days
4) P. Y. : 2009-'10 : During 1-4-'09 to 31-3-'10 :
Only from 12-1-'10 to 31-3-'10 (20 + 28 + 31) = 79 days

P. Y. 2010-'11 : During 1-4-'10 to 31-3-'11 :

From 1-4-'10 to 13-3-'11 (30 + 31 + 30 + 31 +
31+30+ 31 +30 + 31 + 31 + 28 + 13) = 347 days
Total stay during 4 years preceding to the P. Y. 2010-'11= (79 + 46 + 183 + 347) = 655 days
Conditions for Resident Stay in India Whether the
condition is
fulfilled
(1) Was he present in India for 182 From 1-4-2010 to 13-3-2011: ‘Yes’
days during P.Y. 2011-11? Total presence of 347 days

(2) Was he present in India for 60 Present for 347days during P.Y. ‘Yes’
days during P.Y. 2011-11 and for 365 2010-11 and for 655 days during
days during 4 previous years? preceding 4 years.

Thus, the assesse has satisfied both the basic conditions instead of any one basic condition
to become a ‘Resident.’
Heads of Income: Salaries
Basic salary

• Basic salary is the salary paid to an employee before any

additions or reductions to the overall compensation, such as
investments, dues, overtime pay or a bonus.
• Base salary is a fixed amount of money paid to an
employee by an employer in exchange for the man hours
put to work.
 Arrears in salary
• Employees are paid arrears when they get a salary hike in one
month but receive the amount in some other month.
• The due amount in this case which is paid at a later date is termed
as arrears.
Gratuity in salary
• Gratuity is a sum of money paid by an employer to an employee
for services rendered in the company.
• But, gratuity is paid only to employees who complete five or more
years with the company.
Dearness allowance
Dearness allowance is one of the components of the monthly salary
paid only to public sector employees in addition to their basic
salaries.

Education allowance (E.A.)

Children Education Allowance: If you are receiving children education
allowance from your employer then you are eligible to claim a tax
exemption under the Income-tax Act. However, the maximum amount
exempted is Rs. 100 per month or Rs. 1200 per annum for a maximum of
up to 2 children.
Conveyance allowance (C.A.)
Conveyance allowance, also known as transport allowance, is a kind
of allowance offered by employers to their employees to compensate
for their travel expense to and from their residence and workplace.
 Statement of total income of Mr. X
Individual ordinary Previous year: 2010-11
resident Indian citizen Assessment year: 2011-12

Salary Income: Rs. Rs.

Basic allowance *****
Dearness allowance *****
Entertainment allowance *****
Other allowance (to the extent taxable) *****
Taxable value of perquisite *****
Employer’s excess contribution to recognized *****
provident fund *****
Excess interest credited to RPF *****
Other items (e.g. bonus, commission) *****
Gross salary *****
Illustration: 1

Shri Vikram is employed in a company at Delhi. The following are the particulars of his
salary income for the financial year 2010-211 :
1) Basic pay Rs. 15,000 p.m.
2) Dearness Allowance Rs. 5,000 p.m.
3) City Compensatory Allowance 10% of salary.
4) Arrears of salary of earlier previous years received in accordance with the award
of Pay Commission Rs. 30,000.
5) Received from the former employer, in appreciation of his services, Rs. 10,000.
6) Advance salary Rs. 15,000
7) Bonus-two months’ basic pay.

Compute his gross salary for the assessment year 2011-12.

Solution:

Computation of salary income of Shri Vikram

P. Y. 2010-11 A. Y. 2011-12
Rs.
1) Basic salary (Rs. 15000 X 12) 1,80,000
2) Dearness allowance (5000 x 12) 60,000
3) City compensatory allowance (10% of salary) 18,000
4) Bonus (15000 x 2) 30,000
5) Arrears of salary 30,000
6) Amt. received from the former employer in appreciation of services 10,000
7) Advance salary received during the previous year 15,000
Total Gross Salary 3,33,000
Exemption limit
Gratuity is a lum-sum amount paid to an employee when he retires or resigns after a
long service.

A) Gratuity received by an employee covered under the payment of gratuity act, 1972

Exemption limit:-
1. Here, salary or wages means the last drawn salary or wages (including D.A.)
2. A service period of more than 6 months is treated as period of one year.
3. Salary of 15 days is calculated by dividing last drawn salary by 26 and multiplying it
by 15.
Exemption limit
B) Gratuity received by any other employee
Exemption limit:-
Least of the following is exempted gratuity.
1. ½ month’s average salary for each year of completed service (any fraction of year is
ignored).
2. Maximum amount Rs. 20,00,000.
3. Actual amount of gratuity received.
Illustration: 2

Shri Apurva Patel, an employee of Mahavir Ltd. receives Rs. 18,00,000 as gratuity
(under the Payment of Gratuity Act, 1972) on his retirement on 15th December,
2021. He has served the company for a total period of 29 years and 8 months. At the
time of retirement his monthly salary and dearness allowance amounted to Rs.
93,600. Is the entire amount of gratuity exempt from income tax ?

Solution :

Last drawn salary for the purpose of calculation of exempted gratuity (under the
provisions of the Payment of Gratuity Act, 1972) will also include D. A.
Salary = Rs. 93,600 p.m.

Total period of service will be taken as 30 years (more than 6 months to be taken as
one completed year.)
The least of the following is exempt : Rs.

1) Actual amount of gratuity received = 18,00,000

2) 15 days' salary for each year of completed
service (Rs. 93,600 x 15/26 X 30 years) = 16,20,000
3) Maximum amount = 20,00,000

Therefore, exempted gratuity = Rs. 16,20,000

Out of Rs. 18,00,000 received as gratuity, Rs. 16,20,000 is fully exempted from tax and
excess amount of 1,80,000 is to be included in his salary income of P. Y. 2021-22.
Illustration: 2
Shri Randhir Kapoor retires from R. K. Ltd. after 24 years and 8 months of service on
11-9-2021. He had not received any gratuity for 10 year’s service with the former
employer. At the time of retirement he received Rs. 9,50,000 as gratuity. Prior to 1-1-
2021 his basic pay was Rs. 40,000 p.m. which was raised to Rs. 45,000 with effect from
1-1-2021. In addition to above he was paid dearness allowance of Rs. 5,625 p.m.,
which was to be included in his salary for the purpose of provident fund (prior to 1-1-
2021 the rate of D. A. was Rs. 5,000).
Is the amount of gratuity received by him exempt from tax ?
Solution :

Salary in this case will also include D.A ., as it is added to salary for the purpose of
employee's provident fund contribution.
Average monthly salary (including D.A.) for the 10 months before the month
of retirement :

Salary (+ D.A.) of Nov. and Dec ., 2020 Rs.

@ Rs. 40,000 + Rs. 5,000 = Rs. 45,000 p.m. x 2 = 90,000

+ Salary of Jan ., 2021 to Aug ., 2021
@ Rs.45,000 + Rs. 5,625 = Rs. 50,625 p.m. x 8 = 4,05,000
Total of Salary of 10 months = 4,95,000

:. Average monthly salary = Rs.4,95,000 / 10 = Rs. 49,500

(1) Half month's salary for each year of completed
service = 1/2 X 34 years (includes 10 years service
with former employer) x Rs. 49,500 = Rs. 8,41,500

(2) Maximum amount exempt = Rs. 20,00,000

(3) Actual gratuity received = Rs.9,50,000

Rs. 8,41,500 is the least of the above three sums.

Exempted gratuity = Rs. 8,41,500. Excess of Rs. 1,08,500 is taxable, which would be
included in his salary income.
Illustration: 3

Shri Pankaj employed in a firm retires after 32 years and 6 months of service on 31-
3-2021 and receives a gratuity of Rs. 22,33,670. His average monthly salary for the
10 months before the month of retirement was Rs. 80,000.
Is the amount of gratuity received by the assesse exempted from tax?
Compute the exempted gratuity.

Illustration: 4

Shri Bedi retired from a firm after a continuous service of 30 years and 10 months
and receives gratuity of Rs. 3,00,000. At the time of retirement 31-3-2020 he was
getting Rs. 16,000 p.m. as salary.

What amount of gratuity will be taxable for the A.Y. 2011-12?

Pension
It is a periodic payment made to the employee, in consideration of past services and is
taxable as a salary.
Commuted pension
Received by other non-govt. employees is exempted from income-tax to the following
extent.
a) If he has also received gratuity, then 1/3 of the full value of commutable pension is
tax-free.
b) If he has not received gratuity, then 1/2 of the full value of commutable pension is
tax-free.
Illustration: 3
‘Shri A’ retired on 31-10-2021 and received Rs. 8,75,000 as gratuity from his employer.
His monthly pension has been fixed at Rs. 24,000. on 1-2-2022, he receives Rs.
7,83,300 as commuted pension by surrendering his ½ right receive pension.(50%)
Determine the taxability of pension/ commuted pension for the A.Y. 2022-’23?
Solution:-

As Shri A, being a non-govt. employee, has also received gratuity, then commuted
pension is exempted upto 33 1/3 % of total pension receivable.

Commuted pension received @ 50% = Rs. 7,83,300

Commuted pension @ 33 1/3 % = (?)
= 7,83,300 x 100 x 33 1/3 % = Rs. 5,22,200
50
Commuted pension actually received Rs. 7,83,300 – exempted pension Rs. 5,22,200
= Rs. 2,61,100 taxable pension.

Monthly pension received during the previous year (to be included in his Gross Salary)
is calculated as under.

i) From 1-11-2021 to 31-1-2022 at full rate

(Rs. 24,000 x 3 months) = 72,000 Rs.

ii) From 1-2-2022 to 31-3-2022 at ½ rate (uncommuted part) = 24,000 Rs.

(Rs. 12,000 x 2 months)
96,000 Rs.
House Rent Allowance
It is paid by an employer to his employee to enable him to meet the expenditure
actually incurred on payment of rent in respected of residential accommodation
occupied by him.
Exempted amount of HRA
The least of the following three sums is exempted:
1. The actual HRA received.
2. Actual rent paid – 10% of salary.
3. 40% of salary (or 50% in case of 4 metropolitan cities (Mumbai, Kolkata, Delhi,
Chennai).
Taxable Allowance = Total Amount received – Exempted Amount
Illustration;- 5

Mr. ‘X’ of Bangalore gets annual basic salary of Rs. 6,00,000 and dearness allowance of Rs. 2,00,000 p.a.
which is to be included in the salary for the purpose of provident fund purposes. He also gets house rent
allowance of Rs. 1,44,000 p.a. and dearness pay of Rs. 96,000 p.a. The actual house rent paid by him is Rs.
1,62,000 p.a. You are required to calculate the tax-free house-rent allowance for the year P.Y. 2021-’22.

Solution:-
Salary for the purpose of commuting exempted HRA = Basic salary (6,00,000) + D.A.(2,00,000) = Rs.
8,00,000
Computation of exempted HRA:-
The least of the following three sums is exempted:
1. The actual HRA received = 1,44,000
2. Actual rent paid – 10% of salary. = 82,000
(1,62,000 – 80,000 (8,00,000 x 10%)
3. 40% of salary (8,00,000x 40%) = 3,20,000
(as the house is not situated in any metropolitan cities).
 Exempted HRA = 82,000 Rs.
Taxable Allowance = Total Amount received – Exempted Amount
= 1,44,000 – 82,000
= 62,000 Rs. (This will be included in the gross salary).

Illustration;- 6
Ram is entitled to a basic salary of Rs. 5,000 p.m. and dearness allowance of Rs. 1000 per month, 40% of which forms
part of Retirement Benefits. He is also entitled for House Rent Allowance of Rs. 2,000 pm. He actually pays Rs. 2000
p.m. as rent for a house in Delhi.

Solution:-
In the above scenario, we first have to calculate the salary of Ram.
Salary (5000X12) Rs. 60,000
+ Dearness Allowance (40% of 12,000 =(1000 x 12) = Rs. 4,800

Total Salary for the purpose of computation of HRA = Rs. 64,800

Now, the minimum of the following 3 amounts shall be exempted from tax;

a) Actual HRA Received (2000X12) = Rs. 24,000

b) Rent Paid in excess of 10% of salary (24000-6480) = Rs. 17,520

(64,800 x 10%)

c) 50% of Salary = Rs. 32,400

(including metropolitan cities i.e. Delhi)

Therefore, Rs. 17520 shall be the House Rent Allowance (HRA) that is exempted from levy of income

tax and the balance Rs. 6480 shall be included in the gross total salary.
Illustration;- 7
Shri Atul was drawing Rs. 48,000 p.m. as basic salary from Shreeji Ltd ., and 50% of it as dearness
allowance. In addition, he was getting house rent allowance of Rs. 6000 p.m. He resigned from the
company on 30th November, 2021 and joined Vipul Ltd. on 1st January, 2022. He gets from Vipul Ltd.
basic salary at Rs. 64,000 p.m., D.A. of Rs. 24,000 p.m. and house rent allowance Rs. 8,000 p.m. The
provident fund contribution in Vipul Ltd. is calculated on salary including D.A.

If Shri Atul is paying house rent of Rs. 10,000 p.m., determine his tax-free house rent allowance for the
A.Y. 2022-’23.

A) HRA received from Shreeji Ltd. (for 8 months) =(1-4-2021 to 30-11-2021).

In this case, salary means basic salary of 8 months (48,000 x 8) = 3,84,000

The least three exempted;

1. HRA actually received Rs. 6000 x 8 months = 48,000
2. Rent paid in excess of 10% of salary = 41,600
(8 months’ rent Rs. 80,000 – 10% of salary Rs. 3,84,000)
3. 40% of basic salary of 8 months (3,84,000 x 40%) = 1,53,600

Exempted HRA = Rs. 41,600

B) HRA received from Vipul Ltd. (for 3 months) = (1-1-2022 to 31-3-2022).
Basic salary + D.A.
Rs. 1,92,000 + 72,000 = Rs. 2,64,000

The least three exempted;

1. HRA actually received Rs. 8000 x 3 months = 24,000
2. Rent paid in excess of 10% of salary = 3600
(3 months’ rent Rs. 30,000 – 10% of salary Rs. 26,400)
3. 40% of basic salary of 3 months (2,64,000 x 40%) = 1,05,600

Exempted HRA = Rs. 3600

Illustration;- 8

From the following particulars, you are required to compute gross salary of 4 assesses for the Assessment Year 2022-
’23 : (P.Y. 2021-2022).

Name of the assesses

Particulars of Income
A (Rs.) B (Rs.) C (Rs.) D (Rs.)
Basic pay 4,72,000 3,64,000 7,20,000 5,12,000
Dearness allowance 1,18,000 1,82,000 1,44,000 92,800
Bonus 40,000 - 60,000 48,000
House rent allowance 96,000 72,000 12% of salary 1,14,000
Actual rent for the period 1,18,000 84,000 79,200 1,80,000
Place of service Kolkata Nagpur Chennai Mumbai

Note:-

1) D’s provident fund contribution is based on the total of basic salary and dearness allowance.

2) C has occupied his salary his newly constructed house (with effect from) w.e.f 1-1-2022.
Solution:-
Computation of Gross Salary
P. Y. 2021-’22 A. Y. 2022-’23

Assesses (A)

Basic salary 4,72,000

Dearness allowance 1,18,000
Bonus 40,000
HRA 25,200
(Rs. 96,000 – Exempted Rs. 70,800)
Gross Salary 6,55,200
Computation of exempted HRA:-
Least of the following is exempted:-
1) Actual HRA received 96,000
2) Excess of rent paid over 10% of salary (1,18,000 – 47,200) 70,800
3) 50% of salary of Rs. 4,72,000 2,36,000

Rs. 70,800 is exempted.

Assesses (B)

Basic salary 3,64,000

Dearness allowance 1,82,000
HRA 24,400
(Rs. 72,000 – Exempted Rs. 47,600)
Gross Salary 5,70,400
Computation of exempted HRA:-
Least of the following is exempted:-
1) Actual HRA received
2) Excess of rent paid over 10% of salary (84,000 – 36,400) 72,000
3) 40% of salary of Rs. 3,64,000 47,600
Rs. 47,600 is exempted. 1,45,600

Assesses (C)

Basic salary 7,20,000

Dearness allowance 1,44,000
Bonus 60,000
HRA 61,200
(Rs. 72,0000 x 12% = 86,400 – Exempted Rs. 25,200)
Gross Salary 9,85,200
 Computation of exempted HRA:-
Least of the following is exempted:-
1) Actual HRA received for a period of 9 months from 64,800
(1-4-2021 to 31-12-2021 (Rs. 7,20,000 x 12 / 100 x 9/12)
2) Actual rent paid for 9 months’ less 10% of 9 months’ salary 25,200
(79,200 – 54,000)
3) 50% of 9 months’ salary (Rs. 7,20,000 x 9/12 x 50%) 2,70,000
Rs. 25,200 is exempted.

Assesses (D)
Basic salary 5,12,000
Dearness allowance 92,800
Bonus 48,000
HRA ………………
(Rs. 1,14,000 – Exempted Rs. 1,14,000)
Gross Salary 6,52,800
Computation of exempted HRA:-
Least of the following is exempted:-
1) Actual HRA received 1,14,000
2) Actual rent paid less 10% of salary inclusive D.A. 1,19,520
(1,80,000 – 60,480 : 10% of Rs. 6,04,800)
3) 50% of salary including D.A. (50% of Rs. 6,04,800) 3,02,400
Rs. 1,14,000 is fully exempted.
Illustration;- 9

Mr. Karvey is a sales manager employed by Parasonic Limited at Bangalore. The details of his salary and other
emoluments received during the previous year 2021-'22 are as under :

1. Basic salary Rs. 4,20,000 per annum;

2. Dearness allowance (treated as a part of salary for retirement benefits hog: Rs. 42,000 p.a.;
3. Commission on sales Rs. 1,75,000;
4. House rent allowance Rs. 60,000 p.a. (actual rent paid Rs. 8,000 p.m.);
5. Transport allowance Rs. 24,000 p.a.;
6. Tour (Travel) allowance : Rs. 1,200 each for 5 trips (actual amount spent on each trip Rs. 1,000);
7. Tour daily allowance : Rs. 250 per day for 60 days in the year (actual amount spent Rs. 9,600 in total);
8. Uniform allowance Rs. 900 p.m. (for purchase and maintenance); actual amount spent for that purpose at
an average rate of Rs. 750 p.m.;
9. Research assistance allowance Rs. 600 p.m. (spent Rs. 9,000 during the year);
10. Children education allowance Rs. 9,000 (for 2 children);
11. Entertainment allowance Rs. 12,000 p.a.

Compute his taxable salary for the assessment year 2022-'23

Solution:-
Computation of Mr. Karvey’s Taxable salary assessment Gross Salary
P. Y. 2021-’22 A. Y. 2022-’23

1. Basic salary 4,20,000

2. Dearness allowance 42,000
3. Commission (based on sales) 1,75,000
4. HRA 60,000
Less:- Exempted HRA (Note-1) 32,300 27,700
5. Transport allowance (fully taxable) (Note-2) 24,000
6. Tour (Travel) allowance (1200 x 5) 6000
Less:- Exempted (to the extent spent: Rs. 1000 x 5) 5000 1000
7. Tour daily allowance (250 x 60) 15,000
Less:- Exempted (to the extent spent) 9600 5400
8. Uniform allowance (900 x 120 10,800
Less:- Exempted (to the extent spent: Rs. 750 x 12) 9000 1800
9. Research assistance allowance (600 x 12) 7200
Less:- Exempted (to the extent of amount spent: Note-3) 7200 ……………..
10. Children education allowance 9000
Less:- Exempted (@ Rs. 100 p.m. per child for 2 children) 2400 6600
11. Entertainment allowance 12,000
7,15,500
Gross Salary
 Gross Salary 7,15,500
Less:- Specific deductions
1. Standard deduction (as discussed later) 50,000 -
2. Exempted entertainment allowance (Note-4) Nil
3. Professional tax paid (if any) Nil 50,000
Total Taxable Salary 6,65,500

Notes:-
1) Exempted HRA
Salary for this purpose = basic salary Rs. 4,20,000 + D.A. (forming a part of salary) Rs. 42,000 + commission
(based on sales) Rs. 1,75,000 = 6,37,000
Least of the three following:
1) Actual amount of HRA received of Rs. = 60,000
2) Excess of rent paid – 10% of salary (96,000 – 63,700) = 32,300
3) 40% of salary = 2,54,000
Exempted HRA of Rs. 32,300
2) w.e.f. the A. Y. 2020-21, transport allowance is fully taxable.

3) Research assistance allowance is fully exempted (because the assesse has not made any savings

out of this allowance; Excess spending is to be borne by the assesse.)

4) As Mr. Karvey is not a Govt. employee, E.A. is fully exempted.

 Perquisites
Any additional benefit paid / allowed to a person because of his position for his office, in addition to
wages, is called 'perquisite' (popularly known as 'perks').
e.g ., If an officer is given free housing accommodation or a car is provided to him by the employer, then
such facilities are called 'perquisites.' Generally, perquisites are paid in kind *, but it can also be paid in
cash; it must be in money or money's worth. Secondly, it should give a personal advantage to the
employee.

Features of Perquisites :
1. It may be provided either in cash or kind (in the form of use of some facility).
2. If it arises due to employment, it is taxable under the head 'Salary Income.‘
3. If it arises in the course of 'profession', then it shall be taxable under the head 'Profits and Gains from
Business or Profession.‘
4. Unauthorized advantage taken by employee without employer's consent is not considered a
perquisite.
5. Reimbursement of expenses incurred for official purposes is not a perquisite. Tax burden of employee
paid by employer is a perquisite in the hands of employee whether the payment is contractual or
voluntary.
Illustration;- 10

Shri Bhanuprasad serves as the head of sales department of a company. The details about his remuneration for the
financial year 2021-22 are as follows;
1) Basic salary Rs. 4,32,000
2) Bonus Rs. 24,000
3) Commission on sales @ 0.25% Rs. 95,000
4) Dearness allowance Rs. 48,000
(not considered for P.F. benefits)
5) Education allowance (for hostel expenses & educational expenses of 2 children) Rs. 15,600
6) The company has provided him a rent free accommodation owned by the
company in Ahmedabad, whose annual fair rent Rs. 72,000.

Determine the taxable value of perquisite of rent-free accommodation provided to him for the A. Y. 2022-’23.
Solution:-

The education allowance given: = Rs. 15,600

Less:- 1) Education allowance exemption = Rs. 2400
(for 2 children Rs. 100 x 12 x 2)
2) Allowance for hostel expenses exemption = Rs. 7200 Rs. 9600
(for 2 children Rs. 300 x 12 x 2)
Taxable amount Rs. 6000

For the purpose of valuation of perquisite, the ‘salary’ includes;

Basic salary Rs. 4,32,000

Bonus Rs. 24,000
Commission on sales @ 0.25% Rs. 95,000
Taxable education allowance Rs. 6000
Rs. 5,57,000

Value of perquisite of unfurnished accommodation:-

15% of the salary of Rs. 5,57,000 = Rs. 83,500
(As the population of Ahmedabad as per the least published all-India Census is more than 25 lakhs ).
Thank you