INCOME FROM SALARIES

BASIC CONCEPT

Any payment made by an employer to an employee for the services rendered by him is chargeable to tax as salary and envisages a ‘contract of employment’. The employer - employee relationship or master-servant relationship is an essential ingredient of a ‘contract of employment’ as against a ‘contract for employment’.

The distinguishing feature of a ‘contract of employment’ that differentiates it from a ‘contract for employment’ is that the master or employer has the right to supervise and control the work done by the employee and not only directs what and when the work is to be done, but also how it should be done, and the employee is bound to carry out the said instructions. On the other hand, under a contract for employment, the master merely directs what is to be done, while the methodology for carrying out the work is left to the discretion of the servant. E.g. any fees received by a part-time consultant will not be assessed as salary but will be taxed as income from business or profession, or as income from other sources. Similarly, in the absence of master - servant relationship, any remuneration received by a partner from his firm is not regarded as salary.

BASIS OF CHARGE: [SECTION 15]

As per Section 15, salary consists of the following:

• any salary due from an employer or a former employer to an assessee in the previous year, whether actually paid or not;
• Any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, though not due or before it became due;
• Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.

Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier. Once taxed on due basis, the same salary will not once again be taxed on receipt and vice versa.

TAX TREATMENT OF DIFFERENT FORMS OF SALARIES

Type of salary	Taxability
Advance salary	Taxable on receipt basis, in the year in which it is received. Relief under section 89 available.
Arrears of salary	Taxable on receipt basis if the same is not taxed earlier on due basis. Relief under section 89 available
Salary in lieu of notice period	Taxable under section 15
Salary to a partner	Salary paid to a partner is an appropriation of profits. It is therefore not taxable under the head “Salaries” but is taxable under head “profit and gains of business or profession”
Fees and commission	Taxable as salary irrespective of the fact that they are paid in addition to or in lieu of salary
Salary paid tax free	Taxable amount includes the salary as well as the tax borne by the employer
Salary forgone	Application of salary already due; hence taxable
Salary diverted at source by overriding title	Not taxable
Deferred Salary	Taxable at the point of deferral if deferral is at the option of the employee

DEDUCTIONS FROM SALARIES [SECTION 16]

1. Standard Deduction [Section 16(ia)]

A standard deduction is allowed against the salary income subject to a limit of ₹ 50,000/- or the amount of salary whichever is less.

2. Entertainment Allowance [Section 16(ii)]

Entertainment allowance is a taxable allowance and forms a part of the taxable salary. However, Government employees who are in receipt of such an allowance are eligible for a deduction in respect of the entertainment allowance received by them to the extent of the least of the following:

• ₹ 5,000/-
• 1/5th of salary excluding allowances or benefits or perquisites
• Actual entertainment allowance received

The actual expenditure incurred for the purposes of entertainment is not relevant to the calculation of the deduction. No such deduction is available to employees other than Government employees.

3. Tax on Employment [Section 16(iii)]

• Certain Indian States levy a tax on employment commonly known as Profession tax which is required to be recovered by the employer from the salary paid to the employee and deposited into the treasury. Such tax paid by an employee is allowed as deduction from his Salary.
• Deduction is available in the year in which profession tax is actually paid, regardless of which year the profession tax pertains to.
• If Profession Tax is reimbursed/borne by the employer, then such Profession Tax reimbursed/borne by the employer is first included in the taxable income as a perquisite & then allowed as deduction under section 16(iii).

SALARY, PERQUISITES AND PROFITS IN LIEU OF SALARY [SECTION 17]

Section 17 provides inclusive definition of ‘salary’, ‘perquisites’ and ‘Profits in Lieu of Salary’. Hence, the scope of these terms cannot be restricted to and can extend beyond the specific components listed in the definitions.

Salary	Perquisite	Profit in lieu of salary
Wages Annuity or pension Gratuity Fees, commission, perquisites or profits in lieu of or in addition to any salary or wages Advance salary Leave encashment Employer contributions to Provident Fund (PF) and interest in excess of the prescribed limits Taxable portion of the balance transferred to a newly recognized provident fund Employer's contributions to National Pension Scheme (NPS)	Rent-free accommodation Accommodation provided at concessional rates Benefit or amenity granted free of cost or at concessional rates to specified employees Obligation of employee met by the Sum payable by the employer (whether directly or through a fund) to effect an assurance on the life of the employee or to effect a contract for annuity except through a recognised PF, Approved Superannuation Fund and Deposit Linked Insurance Fund Securities and Stock Awards (ESOP) Aggregate of employer’s contribution to Provident Fund, National Pension Scheme (NPS) and Superannuation Fund in excess of INR 7,50,000 and the annual accretions on such taxable contributions, computed in the prescribed manner. Any other fringe benefit or amenity as prescribed in Rule 3 of the Income Tax Rules, 1962	Compensation from the employer or former employer at or in connection with termination of employment or modification of the terms and conditions of employment Any payment from the employer or former employer or from a PF or other fund, to the extent it does not consist of employee's contribution or interest thereon Any sum received under a Keyman insurance policy including bonus on such policy Any amount received in lumpsum or otherwise from any person before joining or after cessation of employment

ALLOWANCES

An allowance is a fixed amount of money paid regularly in addition to the salary for meeting specific requirements of the employees. As a general rule, any fixed allowance received by an employee forms part of his taxable salary unless specifically exempted. The taxability of various allowances an employee could receive is summarized in the table below:

Allowances	Taxability/Limits	Section
Leave Travel Allowance (LTA)	Assessee who incurs expenditure for travel for assessee and his family (up to 2 children) on leave to any destination in India is eligible for exemption in respect of LTA to the extent of expenses actually incurred for the purpose of such travel subject to the following limits: Exemption only in 2 out of a block of 4 years (current block: 1st January 2018 to 31st December 2021) with option to claim exemption for 1 journey (out of the 2) in the calendar year immediately following the end of the block.	10(5) read with Rule 2B
Allowance granted to Government Employees outside India	Fully Exempt	10(7)
House Rent Allowance (HRA)	The least of the following is exempt: 40% of salary [50% if house situated at Mumbai, Kolkata, Delhi or Chennai] HRA actually received in respect of the period during which the accommodation is occupied on rent. Rent Paid - (Salary x 10%) [Salary = Basic + Dearness Allowance (if provided by the terms of employment) + commission based on fixed % of turnover] Exemption shall not be allowed, if the employee resides in a house that is owned by him or if no actual expenditure is incurred by the employee on rent	10(13A) read with Rule 2A
Uniform Allowance	Exempt from tax, to the extent it is expended to meet actual expenditure on purchase or maintenance of uniform	10(14) read with Rule 2BB(1)
Academic, research and training allowance	Exempt from tax, to the extent it is actually expended by the employee for the purpose of academic, research and training pursuits in educational and research institutions	10(14) read with Rule 2BB(1)
Travel allowance	Exempt from tax, to the extent it is actually expended by the employee to meet cost of travel on tour or on transfer. This includes any sum paid in connection with transfer, packing and transportation of personal effects on transfer	10(14) read with Rule 2BB(1)
Per diem	Exempt from tax, to the extent it is actually expended to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty while on tour or for the period of journey in connection with transfer	10(14) read with Rule 2BB(1)
Conveyance allowance (official duties)	Exempt from tax, to the extent it is actually expended by the employee to meet expenditure incurred on conveyance in performance of duties of an office or employment of profit. Exemption is not available if free conveyance is provided by the employer	10(14) read with Rule 2BB(1)
Helper allowance	Exempt from tax, to the extent it is actually expended to meet the expenditure incurred on a helper where such helper is engaged for the performance of the duties of an office or employment of profit	10(14) read with Rule 2BB(1)
Children Education allowance	Exempt up to ₹ 100 per month per child; maximum 2 children	10(14) read with Rule 2BB(2)
Children hostel allowance	Exempt up to ₹ 300 per month per child; maximum 2 children	10(14) read with Rule 2BB(2)
Allowance granted to an employee working in any transport system	Lower of 70% of allowance or ₹ 10,000 per month is exempt Exemption is not available if the employee is in receipt of a daily allowance	10(14) read with Rule 2BB(2)
Transport Allowance (between residence and office) to an employee who is blind or deaf and dumb or orthopedically handicapped with disability of lower extremities	Exempt up to ₹ 3,200 per month
Tribal area allowance	Exempt up to ₹ 200 per month in specified areas	10(14) read with Rule 2BB(2)
Compensatory field area allowance	Exempt up to ₹ 2,600 per month in specified areas	10(14) read with Rule 2BB(2)
Compensatory modified field area allowance	Exempt up to ₹ 1,000 per month in specified areas	10(14) read with Rule 2BB(2)
Special Compensatory hill area or high altitude	Exempt up to ₹ 300 per month to ₹ 7,000 per month in specified areas	10(14) read with Rule 2BB(2)
Border area, remote area, Difficult/disturbed area allowance	Exempt up to ₹ 200 per month to ₹ 1,300 per month for specified areas	10(14) read with Rule 2BB(2)
High altitude allowance (Non-congenial climate)	Exempt up to ₹ 1,060 per month (Altitude for 9,000 ft. to 15,000 ft.), ₹ 1,600 per month (above 15,000 ft.)	10(14) read with Rule 2BB(2)
Special compensatory for highly active field area allowance to member of armed force	Exempt up to ₹ 4,200 per month.	10(14) read with Rule 2BB(2)
Underground allowance to an employee working in uncongenial, unnatural climate in underground mines	Exempt up to ₹ 800 per month	10(14) read with Rule 2BB(2)
Island duty allowance to member of armed force	Exempt up to ₹ 3,250 per month in Andaman & Nicobar and Lakshwadeep Group of Islands	10(14) read with Rule 2BB(2)
Counter Insurgency Allowance to member of armed forces operating in areas away from their permanent locations	Exempt up to ₹ 3,900 per month	10(14) read with Rule 2BB(2)
Dearness allowance	Fully Taxable	17
Overtime allowance	Fully Taxable	17
Medical allowance	Fully Taxable	17
City Compensatory allowance	Fully Taxable	17
Interim allowance	Fully Taxable	17
Servant allowance	Fully Taxable	17
Project allowance	Fully Taxable	17
Tiffin/Lunch/Dinner allowance	Fully Taxable	17
Warden allowance	Fully Taxable	17
Any other cash allowance	Fully Taxable	17

*For financial year 2020-21, given the travel restrictions due to Covid-19 pandemic, the cash allowance in lieu of travel concession or assistance received by or due to an individual was exempt from tax, subject to the following conditions.

• The employee exercises option for deemed Leave Travel Concession fare in lieu of applicable Leave Travel Concession for the block year 2018-21.

• He/she has incurred expenditure during the period between 12 October 2020 and 31 March, 2021 on goods or services liable to Goods and Service Tax at 12 percent or above and goods are purchased or services procured from GST registered vendors/service providers.

• Amount of exemption did not exceed lower of INR 36,000 per person or one-third of specified expenditure.

• The employee made payment through account payee cheque, draft or through prescribed electronic mode and tax invoice was obtain from such vendor/service provider.

VALUATION OF PERQUISITES [RULE 3]

Perquisites, for the purposes of taxation, are to be valued on the basis of valuation methodology as prescribed in Rule 3 of the Income Tax Rules. It is pertinent to note that the cost of the perquisite to the employer may be different from the taxable value of the perquisite. The taxable value of the perquisite provided by the employer is chargeable to tax whether or not expressly agreed in the contract of employment. A perquisite may be provided to the employee or any member of his household and may be provided before, during or after the employment by virtue of the employer- employee relationship. The beneficiary of the perquisite should be individually identifiable - Group benefits which are not identifiable to any particular employee are not taxable.

1. RENT FREE ACCOMMODTION ['RFA']

Accommodation includes accommodation provided in

• House
• Flat
• Farm House or part thereof
• Caravan
• Mobile home
• Ship or other floating structures
• Hotel

Hotel Accommodation includes accommodation in

• Motels
• Service apartment
• Guest house

* Only to employees holding office or post in connection with the affairs of the Union or State
**As per 2001 census
*** Not taxable if hotel accommodation is provided for not more than 15 days on transfer of employee from one place to another

Furnished Accommodation

In case furniture including TV, washing machine, air conditioner, refrigerator and other household appliances are provided then the value of accommodation should be increased further by the following:

• 10% p.a. of cost of furniture, if the furniture is owned by the employer or
• actual hire charges, if the furniture is hired from a third party

Accommodation provided at concessional rate

For accommodation provided at concessional rate, the rent actually paid or recovered from the employee should be reduced from the value of the accommodation determined as above.

For the purpose of above calculation, Salary includes all emoluments paid to an employee but excludes dearness allowance which is not included in the computation for retirement benefits, allowances which are exempt from tax, value of perquisites under section 17(2), employer’s contribution to PF and lumpsum payments received on retirement/termination.

Accommodation provided to an employee working on a mining site, onshore exploration site, project site, dam site power generation site or any other offshore site with prescribed specifications in a remote area is not taxable.

If at the time of transfer from one place to another, an employee is provided accommodation at the new place while he retains accommodation at the other place, the accommodation with a lower perquisite valuation will be taxed for 90 days and thereafter the value of both accommodations will be taxable as perquisite.

2. MOTOR CAR

A car provided by the employer to an employee is a popular tax efficient component of compensation especially among the senior employees of an organisation. The taxable value of a car provided by the employer is determined as per the valuation rules provided in the Income Tax Rules. The table below summarises the taxable value of a motor car provided by the employer:

Purpose	CC* of engine =< 1.6 litres	CC* of engine > 1.6 litres
Motor car owned/leased by the employer
Official	NIL$	NIL$
Personal purposes only	Actual cost of R&M** of car + driver’s salary + normal wear and tear @ 10% per annum of the actual cost of car less any charges recovered from the employee	Actual cost of R&M of car + driver‘s salary + normal wear and tear @ 10% per annum of the actual cost of car less any charges recovered from the employee
Personal & Official - R&M met by employer	₹1,800 p.m. + ₹ 900 p.m. (If driver is provided)	₹ 2,400 p.m. + ₹ 900 p.m. (If driver is provided)
Personal & Official - R&M met by employee	₹ 600 p.m. + ₹ 900 p.m. (If driver is provided).	₹ 900 p.m. + ₹ 900 p.m. (If driver is provided).
Employee owns motor car but R&M and Driver’s salary met by employer
Official	NIL$	NIL$
Personal & Official - R&M met by employer	Actual expenses less ₹ 2,700 p.m.	Actual expenses less ₹ 3,300 p.m.
Employee owns any other automotive conveyance but R&M is met and reimbursed by employer
Official	NIL$	Not Applicable
Personal & Official - R&M met and reimbursed by employer	Actual expenses less ₹ 900 p.m.	Not Applicable
*CC - Cubic capacity **R&M - Running and maintenance $ - The employer is required to maintain complete details of journey undertaken for official purpose by the employee with date of journey, destination, mileage and the amount of expenditure actually incurred. Further, the employer is required to issue a certificate that such expenditure was incurred wholly and exclusively for official purpose.

3. DOMESTIC SERVANTS

Servants	Perquisite Value
Sweeper, Gardener, Watchman or Personal attendant	Actual Cost to the employer less amount recovered from employee

4. GAS, ELECTRICITY OR WATER SUPPLIED BY EMPLOYER

Source	Perquisite Value
Provided from own source	Manufacturing cost to the employer less amount recovered from employee
Provided from outside supplier	Amount paid to the supplier less amount recovered from employee

5. EDUCATION FACILITIES

Facility provided to	Value of perquisite
	Provided in the school owned by the employer	Provided in any other school
Children	Cost of such education in similar school if it exceeds ₹ 1,000 per month per child	Cost of such education if it exceeds ₹ 1,000 per month per child
Other household member	Cost of such education in similar institution in or near the locality	Cost of such education incurred

The amount if any, recovered from the employee shall be reduced from the perquisite value.

6. SPECIFIED SECURITY OR SWEAT EQUITY SHARES ALLOTTED

1. “Specified Security” means the securities as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956 and also includes securities offered under an Employee Stock Option Plan (ESOP);
2. Sweat equity shares means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in nature of Intellectual Property Rights or value additions.
3. Perquisite will be taxable as the difference between the fair market value (FMV) of the share on the date of exercise of the options less the exercise price.

Calculation of FMV on date of exercising the option

Particulars	FMV
Listed on a recognised stock exchange	Average of opening and closing price on that date
Listed on more than one recognised stock exchange	Average of opening and closing price of the share on the recognised stock exchange which records the highest volume of trading in the share
If there is no trading in the share on any recognised stock exchange on that date:
If share listed on a recognised stock exchange	Closing price of share on any recognised stock exchange on a date closest to date of exercising the option and immediately preceding such date
If share listed on more than one recognised stock exchanges	Closing price of share on any recognised stock exchange, which records the highest volume of trading in such share on a date closest to date of exercising the option and immediately preceding such date
If shares not listed on a recognised stock exchange or any specified security other than equity shares	Such value as determined by a Category I merchant banker listed with SEBI on the specified date (i.e. Date of exercise or any date not being more than 180 days prior to the date of exercise)

Note: Where the stock exchange quotes both “buy” and “sell” prices, the opening and closing price shall be the “sell” price of the first and last settlement respectively.

7. MEDICAL EXPENSES

Certain medical expenses borne/reimbursed by the employer are not considered to be a perquisite and are specifically exempted under section 17(2). Such expenses are:

• Medical treatment provided to an employee or any member of his family:
  • in the hospital maintained by the employer;
  • in the hospital maintained by the Government/Local authority/any other hospital approved by the government for the medical treatment of its employee;
  • in respect of prescribed disease or ailments in any hospital approved by the Chief Commissioner having regards to the prescribed guidelines and supported by a certificate and receipt from the hospital;
  • in respect of any illness relating to COVID-19 subject to such conditions as the Central Government may specify.
• premium paid/borne by the employer in respect of health insurance of employee or a member of his family under a scheme approved by the Central Government or the IRDA;
• In case of an employee whose gross total income does not exceed ₹ 2 lakh, any expenditure incurred outside India on the medical treatment of an employee or member of his family including travel and stay abroad for the patient and one attendant, subject to limits prescribed by Reserve Bank of India.

8. INTEREST FREE LOAN

Where the employer grants a loan to an employee interest free or at a concessional rate of interest, a notional interest thereon is charged to tax in the hands of the employee. As per the Income tax rules, the value that will chargeable to tax shall be calculated on the maximum outstanding monthly balance based on the interest rates charged by the State Bank of India as on the 1st day of the financial year in respect of loans for the same purpose advanced by it (refer the page on interest rate for the purpose of perquisite valuation on https://www.sbi.co.in as reduced by the interest actually recovered from the employee.

However no notional interest is charged to tax in the case of the following loans:

• A loan given for the purpose of medical treatment of certain prescribed diseases as mentioned in Rule 3A of the Income-tax rules (and is not reimbursed to the employee under a medical insurance scheme)
• A loan not exceeding in the aggregate ₹ 20,000/-.

In case the loan is given for medical purpose the employer should obtain the bills, certificate, supporting, etc. from the employee evidencing the fulfilment of the prescribed conditions.

9. USE OF MOVABLE ASSETS

Assets given	Value of benefit
a) Use of laptops and computers	Nil
b) Movable asset other than laptops and computers	10% p.a of the actual cost, if owned by employer the amount of rent paid or payable by the employer if hired As reduced by the amount recovered from employee

10. MOVABLE ASSETS SOLD TO EMPLOYEE

Assets given	Value of benefit
Computers and electronics	Depreciated value of the asset (depreciation is computed @50% on WDV for each completed year of usage) Less: amount recovered from employee
Motor Cars	Depreciated value of the asset (depreciation is computed @20% on WDV for each completed year of usage) Less: amount recovered from employee
Any other asset	Depreciated value of the asset (depreciation is computed @10% on SLM for each completed year of usage) Less: amount recovered from employee

11. TOUR OR TRAVEL

Benefit provided	Value of benefit
Value of tour, travel and accommodation provided to an employee or member of his household paid or borne by employer and not covered under section 10(5)	Amount of expenditure actually incurred Less: Amount recovered from the employee
Value of tour, travel and accommodation provided to an employee or member of his household where the facility is maintained by the employer and is not provided uniformly to all employees	Value at which such services are offered to public by other agencies Less: Amount recovered from the employee
Value of tour, travel and accommodation provided to a member of the employee’s household where the employee is on official tour*	Amount of expenditure actually incurred Less: Amount recovered from the employee
*Where an official tour is extended as vacation, the value of benefit shall be restricted to the extended period of stay or vacation.

12. MISCELLANEOUS

Particulars	Value of benefit
Free food and non-alcoholic beverages during office hours (Free meal in remote area or offshore installation area is not a taxable perquisite)	Food and non-alcoholic beverages during office hours or by way of vouchers is valued as the actual cost to the employer in excess of ₹ 50 per meal Less: amount recovered from employee, if any Tea and snacks provided during working hours is not taxable
Value of any gift or voucher or token other than gifts made in cash or convertible into money (e.g., gift cheques) on ceremonial occasion	Value of gift. In case the aggregate value of gift during the previous year is less than INR 5,000, then it is not a taxable perquisite.
Expenditure incurred on credit card or add on card including membership fee and annual fee	Actual expenditure to the employer is taxable Less: amount recoverable from employee If it is incurred for official purpose and supported by necessary documents (including a certificate from the employer) then it is not taxable
Expenditure on club (other than health club or sports club or similar facilities provided uniformly to all the employees)	Actual expenditure incurred by the employer Less: Amount recoverable from employee If the expenditure is incurred exclusively for official purpose and supported by necessary documents (including a certificate from the employer) then it is not taxable. Initial fee of corporate membership of a club is not a taxable perquisite
Any other benefit or amenities or service or right or privilege provided by the employer other than telephone or mobile phone	Cost to the employer Less: Amount recovered from the employee
Any sum paid to keep in effect an assurance on the life of an assessee or to keep in effect a contract for annuity**	Cost to the employer Less: Amount recovered from the employee
Value of any benefit or amenity resulting from providing an employee or member of his household for personal use or private journey or the movement of goods for personal use in the employer’s owned transport where the employer is engaged in the carriage of goods or passenger ***	Value at which such benefit is offered to the public Less: Amount recovered from the employee
Use of vehicle provided by the employer for the journey of the employee from his residence to office or any other place or work or vice versa.	NIL. This is not to be regarded as benefit or amenity granted to employee free of cost or at concessional rate
**Will not apply if amount is paid to a recognised provident fund or approved superannuation fund or a Deposit Linked Insurance Fund established under section 3G of the Coal Mines Provident Fund and Miscellaneous Provision Act, 1948 or under section 6C of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 ***Does not apply to employees of an airline or railways

13. SUPERANNUATION FUND

Aggregate of employer’s contributions to Superannuation Fund, Provident Fund and National Pension Scheme (NPS), in excess of INR 7,50,000 and the annual accretions on such taxable contributions (computed in the prescribed manner) is subject to tax in the hands of the employee.

Any payment from an approved superannuation fund made on the death of the employee or in commutation of an annuity on his retirement at a specified age or on his becoming incapacitated prior to such retirement is exempt from tax under section 10(13).

EXEMPTIONS

1. GRATUITY [SECTION 10(10)]

Gratuity is exempt only when it is received on - (a) retirement, or (b) becoming incapacitated prior to such retirement; or (c) resignation; or (d) termination of services.

Exemption is also available for gratuity received by the widow, children or dependents of the employee on his death.

Particulars	Amount of exemption
Gratuity received by Government & Local Authority Employees	Fully exempt under section 10(10)(i)
Gratuity in case of employees covered by Payment of Gratuity Act, 1972	Lower of following amount is exempt: [15/26] x Salary last drawn x completed years of service or part thereof in excess of 6 months Maximum amount ₹ 20,00,000 Actually received [Salary = Basic Pay + Dearness Allowance]
Gratuity in respect of any other employee	Lower of following amount is exempt: 1/2 x average salary x completed years of service (ignore fraction) Maximum amount ₹ 20,00,000 Actually received [Salary = Basic Pay + Dearness Allowance + Commission based on the % of Turnover

Notes:

1. Average Salary = Average salary drawn for last 10 months preceding month of retirement.
2. Gratuity received during continuation of service is not exempt under this section.
3. The aggregate exemption allowable to an employee in one or more previous years should not exceed the maximum amount (currently ₹ 20 lakh)
4. Completed years of service include period of service under current employer as well as previous employer (if no gratuity has been received from the former employers at that time)

2. PENSION: [SECTION 10(10A)]

Particulars	Government Employee	Non-Government Employee receiving gratuity	Non-Government Employee not receiving gratuity	From approved pension fund of LIC or other Insurer
Uncommuted Pension	Fully Taxable	Fully Taxable	Fully Taxable	Fully Taxable
Commuted Pension	Fully Exempt [section 10(10A)(i)]	1/3rd of full value will be exempt [section 10(10A)(ii)]	1/2 of full value will be exempt [section 10(10A(iii)]	Fully Exempt

3. LEAVE SALARY (ENCASHMENT): [SECTION 10(10AA)]

Particulars	Central or State Government Employee	For any other employee
Encashment of leave during service	Fully Taxable. However relief can be taken under section 89	Fully Taxable. However relief can be taken under section 89
Encashment of leave during retirement	Fully Exempt	Amount exempt shall be lower of following: Earned leave in months x Average Salary; Average monthly Salary x 10; Maximum Amount ₹ 3,00,000; Actual amount received
Average monthly salary for this purpose means average salary drawn in last 10 months immediately preceding the retirement. The aggregate exemption allowable to an employee in one or more previous years should not exceed the maximum amount (currently ₹ 3 lakh) Salary = Basic Pay + Dearness Allowance (forming part of retirement benefits) + Commission based on the % of turnover Steps to determine period of leave in months: of actual completed years of service Number of days leave entitlement for each completed year of service as per rules of the employer (not exceeding 30 days for each year) Gross total leave in days (step 1 x step 2) Less: Leave enchased & availed during continuation of service (in days) Period of earned leave (in days) (step 3 - step 4) Period of leave in months (step 5/30)

4. RETRENCHMENT COMPENSATION [SECTION 10(10B)]

Compensation received at time of retrenchment, is exempt from tax to the extent of lower of the following:

• 15 days' average pay for each completed year of service or any part in excess of six months
• Maximum amount ₹ 500,000
• Actual amount received

5. VOLUNTARY RETIREMENT COMPENSATION [SECTION 10(10C)]

Any amount received or receivable by an employee of �

• A public sector company
• Any other company
• Authority established under a Central, State or Provincial Act
• A local authority
• A co-operative society
• A university established under a Central, State or Provincial Act or covered under the University Grants Commission Act
• Notified Indian Institute of Technology
• Notified Institute of Management
• Indian Institute of Foreign Trade, New Delhi
• Any State Government
• Any Central Government
• Any other Institute notified by Central Government

at the time of his voluntary retirement under a scheme framed in accordance with guidelines prescribed by Rule 2BA is exempt up to specified limits.

Exemption is least of the following:

• Actual amount received under the Voluntary Retirement Scheme.
• ₹ 5 lakhs (to be reduced by total exemptions claimed in the past) in total from one or more employer

6. TAX PAID BY EMPLOYER ON BEHALF OF EMPLOYEE [SECTION 10(10CC)]

Tax paid by the employer on behalf of the employee is ordinarily considered to be a perquisite in the hands of the employee. However, tax paid by the employer, at his option, on behalf of the employee, on a perquisite provided to the employee other than by way of monetary payment - e.g. motor car, accommodation, etc., shall be exempt in the hands of employee. Such tax shall not be allowed as a deduction to the employer in terms of Section 40(a)(v).

PROVIDENT FUND AND NPS - COMPARATIVE ANALYSIS

Particulars	Employer’s contribution	Employee’s contribution	Income credited	Lump sum payment received at the time of retirement or termination of service or withdrawal
Statutory provident fund/Government provident fund	Not taxable	Eligible for deduction under section 80C	Fully exempt From financial year (FY) 2021-22, if there is no contribution by the employer (i.e., the government), employees of the government sector can contribute a maximum of INR 5,00,000 into their provident fund accounts in a financial year to earn tax-exempt interest. The interest on the contribution over INR 500,000 would be taxable as income from other sources. The manner of computing such interest is prescribed in Rule 9D	Exempt under section 10(11)
Recognised provident fund	Not taxable up to 12% of salary*	Eligible for deduction under section 80C	Exempt up to 9.5%* Further, from FY 2021-22, interest accrued during the previous year on employee contributions to provident fund exceeding INR 250,000 would be taxable as income from other sources. The manner of computing such interest is prescribed in Rule 9D.	Exempt from tax under section 10(12) Subject to conditions: not taxable if employee retires after 5 years of service or due to inability to work. Otherwise treated as URPF
Unrecognised provident fund (URPF)	Not taxable	Not eligible for deduction under section 80C	Not taxable at the time of credit	Employee’s contribution exempt from tax and interest thereon is taxable under the head ‘income from other sources’. Employer’s contribution and interest thereon is taxable as ‘Profits in lieu of salary’ under the head “Salaries”
Public provident fund	Employer does not contribute	Eligible for deduction under section 80C	Exempt from tax Further, from FY 2021-22, interest accrued during the previous year on employee contributions to public provident fund exceeding INR 250,000 would be taxable as income from other sources. The manner of computing such interest is prescribed in Rule 9D. However, since contributions exceeding INR 1,50,000 per financial year are currently not allowed in a PPF account, this provision would not apply.	Exempt under section 10(11)
National pension system	Taxable* as salary and deductible under section 80CCD (2) up to 14% of employee’s salary in case of government employees and 10% in case of all non-government employees.	Eligible for deduction under sections 80CCD(1) [10% of salary] and 80CCD(1B) [₹ 50,000]	Exempt from tax*	60% of NPS corpus tax exempt on lump sum withdrawal on closure of account. Amount of corpus utilised for purchase of annuity is also exempt. No tax will be levied on partial withdrawal, not exceeding 25% of contribution, from NPS. The 25% withdrawal is permitted not on corpus but on contribution. Further, NPS subscriber has a one-time option to transfer funds from recognised provident fund/ superannuation fund to his Tier I NPS account. This amount so transferred will neither be treated as income of the year of transfer nor will be eligible for any claim of contribution/deduction.
*Employer’s contributions to Provident Fund, National Pension Scheme (NPS) and Superannuation Fund in excess of INR 7,50,000 in aggregate are taxable. Further, the annual accretions on such taxable contributions, will also be subject to tax. The manner in which it is to be computed has been prescribed in new Rule 3B to the Income-tax Rules, 1962 (Rules). As per the aforesaid, computation has to be made as follows: TP= (PC/2)*R + (PC1+ TP1)*R Where, TP= Taxable perquisite under sub-clause (viia) of clause (2) of section 17 of the Act for the current previous year; TP1 = Aggregate of taxable perquisite under sub-clause (viia) of clause (2) of section 17 of the Act for the previous year or years commencing on or after 1st day April, 2020 other than the current previous year (See Note); PC= Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs. 7.5 lakh to the specified fund or scheme during the previous year; PC1 = Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs. 7.5 lakh to the specified fund or scheme for the previous year or years commencing on or after 1st day April, 2020 other than the current previous year (See Note); R= I/ Favg ; I=Amount or aggregate of amounts of income accrued during the current previous year in the specified fund or scheme account; Favg = (Amount or aggregate of amounts of balance to the credit of the specified fund or scheme on the first day of the current previous Year + Amount or aggregate of amounts of balance to the credit of the specified fund or scheme on the last day of the current previous year)/2. Explanation. — For the purposes of this rule, “specified fund or scheme” shall mean a fund or scheme referred to in sub-clause (vii) of clause (2) of section 17 of the Act. Note: Where the amount or aggregate of amounts of TP1 and PC1 exceeds the amount or aggregate of amounts of balance to the credit of the specified fund or scheme on the first day of the current previous year, then the amount in excess of the amount or aggregate of amounts of the said balance shall be ignored for the purpose of computing the amount or aggregate of amounts of TP1 and PC1.”.