• Pension is taxable as salary (S. 17(1)(ii)).

• Commuted value of pension is exempt u/s. 10(10A).

i. for Government employees, fully exempt

ii. for other employees, following is exempt —

a. if employee has received gratuity then commuted value of 1/3rd of the pension which he is entitled to receive and

b. in any other case, commuted value of 1/2 of the pension which he is entitled to receive.

iii. any payment in commutation of pension received from fund set up by LIC is exempt u/s. 10(23AAB).

Death-cum-retirement gratuity received by the Government employees or employees under Civil Services — wholly exempt from tax.

i. Employees covered by Payment of Gratuity Act.

Amount received on termination, after continuous service of not less than five years qualifies for exemption

Exemption is least of the following : (aggregate maximum from any number of employers)

1. 15 days salary (denominator taken as 26 in case of monthly salary) for every completed year/part thereof in excess of 6 months, or

2. Rs. 3,50,000/-

3. gratuity actually received whichever is less.

ii. Other employees — Amount received on retirement, incapacitation, death or termination — Exemption is least of the following : (aggregate maximum from any number of employments)

1. Rs. 3,50,000/-

2. half month’s salary for each completed year of service; (based on last ten months’ average salary), or

3. gratuity actually received.

• For meaning of “salary”. Refer para 6 below.

1. Exempt to the extent of the lower of the following:

1. amount calculated in accordance with S. 25F(b) of the Industrial Disputes Act, 1947; or

2. Rs. 5,00,000/-

2. In cases where the scheme is approved by the Central Government the entire amount is exempt.

Any amount received or receivable by an employee of

1. a public sector company, or

2. any other company, or

3. an authority established under a Central, State or Provincial Act, or

4. a local authority

5. a co-operative society

6. a university established under a Central, State or Provincial Act

7. an Indian Institute of Technology

8. any State Government; or

9. the Central Government; or

10. notified institutions having importance throughout India or in any state or states.

11. notified Institute of Management
    
    at the time of his voluntary retirement or termination under a scheme framed in accordance with guidelines prescribed by Rule 2BA. Exemption allowable only in One A.Y. Restricted to Rs. 5 lakhs. The said limit is relaxed w.e.f. A.Y. 2004-05 to cover VRS payments received in instalments with an overall limit of Rs. 5,00,000.

 * The exemption is restricted w.e.f. 1-4-2010 where any relief has been allowed to the assessee u/s. 89 for any Asst. Year in respect of any amount received or receivable on voluntary retirement or termination etc.

The least of the following is exempt from tax:

1. 50% of salary, (residential house situated at Mumbai, Kolkata, Delhi or Chennai) and 40% of salary where residential house is situated at any other place;

2. actual house rent allowance received by the employee;

3. excess of rent paid over 10% of salary.

Encashment of earned leave while in service will be treated as income. S. 17(1)(va).

Encashment of earned leave on retirement would however, be exempt to the extent of least of:

1. 10 months salary calculated on the basis of last 10 months average salary or

2. Rs. 3,00,000

3. Amount equivalent to earned leave

4. Actual amount paid by the employer

Entitlement to earned leave not to exceed 30 days for every year of actual service.

Limits provided for aggregate maximum from any number of employers.

Encashment of earned leave on retirement would be wholly exempt for employees of Central/State Government.

Medical treatment provided to an employee or any member of his family (spouse, children and dependent brothers, sisters and parents) will be exempt in the following cases:

1. treatment in a hospital (including dispensary or clinic or nursing home) maintained by the employer,

2. treatment in any hospital maintained by the Government, or any local authority or any other hospital approved by Govt.,

3. treatment in respect of prescribed diseases in a hospital approved by the Chief Commissioner, provided certificate from the hospital specifying the disease and receipt for amount paid is attached along with the return of income,

4. medical insurance only under a Central Government approved scheme,

5. reimbursement of Insurance premium for mediclaim etc.,

6. reimbursement of amounts actually spent for medical treatment other than treatment referred in (i), (ii) & (iii) above, not exceeding in aggregate Rs. 15,000 in F.Y.,

7. actual expenditure on medical treatment outside India, including expenditure on travel and stay abroad as also on travel and stay abroad of one attendant, to the extent permitted by RBI. Expenditure on travel abroad will be exempt only if the gross annual total income of the employee excluding this perquisite is Rs. 2 lakhs or less.

Following prescribed special allowances are exempt :

1. allowance, not in the nature of perquisite, granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties, to the extent to which actually incurred.

2. allowance granted to meet personal expense at the place where duties of his office are ordinarily performed or at the place where he ordinarily resides or to compensate for increased cost of living as may be prescribed in Rule 2BB.

1. For cost of travel on tour or on transfer,

2. For ordinary daily charges on account of absence from normal place of duty on tour or for journey in connection with transfer,

3. For conveyance in performance of duties, where free conveyance is not provided,

4. For expenditure on helper engaged for performance of office duties,

5. For encouraging academic, research and training pursuits in educational and research institutions,

6. For purchase or maintenance of uniform,

7. Special Compensatory Allowance in specified areas to extent specified,

8. Tribal Area Allowances in specified states up to Rs. 200 p.m.

9. For meeting personal expenditure of employee of transport system running transport vehicle, up to 70% of allowance, maximum of Rs. 6,000 p.m., provided no daily allowance for the said duty is received.

10. Children educational allowance @ Rs. 100 p.m. per child, maximum of two children,

11. Children hostel allowance @ Rs. 300 p.m. per child, maximum of two children,

12. Compensatory Field Area Allowance in specified areas, @ Rs. 2,600 p.m.

13. Compensatory modified field area allowance @ Rs. 1,000 p.m.

14. Counter insurgency allowance @ Rs. 3,900 p.m. to members of armed forces.

15. Transport allowance (TA) granted to meet expenses for commuting between place of residence and place of duty is exempt up to Rs. 800 per month and TA received by blind or orthopaedically handicapped is exempt up to Rs. 1,600 per month.

16. Underground allowance granted to employee of underground coal mines : Rs. 800 per month.

17. Special allowance in the nature of high altitude to members of armed forces : Rs. 1,060 per month for altitude of 9,000 to 15,000 ft. or Rs. 1,600 per month for altitude above 15,000 ft.

18. Special compensatory highly active field area allowance to members of armed forces – Rs. 4,200 per month.

19. Island (duty) allowance to members of armed forces – Rs. 3,250/- per month.

1. value of rent-free accommodation.

2. value of concession in rent.

3. amount paid by employer in respect of any obligation which otherwise would have been payable by employee.

4. value of any fringe benefit or amenity (excluding the fringe benefits chargeable to tax under Chapter XII-H) as prescribed.
   
   W.e.f. 1-4-2010, following clauses are substituted/added.
   
   (a) value of any security or sweat equity shares allotted or transferred by employer/former employer as free or concessional cost.
   
   (b) an amount of contribution to an approved superannuation fund by the employer, to an extent it excess Rs. 1,00,000/-.

5. any sum payable either directly or through a fund by employer (other than recognised PF, approved superannuation fund etc.) to effect an assurance on the life of the employee or to effect a contract for an annuity.

i. Interest free or concessional loan

Value of perquisite w.e.f. 1-4-2000, of the loan given to the employee or any member of his household shall be at the rates charged by State Bank of India in respect of the loans for the same purpose advanced by the employer, on the maximum outstanding monthly balance as reduced by interest actually paid by employee – However, perquisite value for loans (net of amount reimbursed under medical insurance scheme) given for medical treatment of specified disease or petty loans up to Rs. 20,000 is not taxable.

ii. Use of movable assets

Value of benefit shall be 10% p.a. of the actual cost of asset or the rent charges paid by the employer as reduced by amount paid by the employee.

iii. Transfer of movable assets

Value of benefit on transfer of movable asset shall be the actual cost of the asset to the employer as reduced by the amount calculated at 10% of such cost for each completed year of use by the employer and further reduced by the payments made by the employee. The normal wear and tear would be computed at 50% in case of computers and electronic items, and 20% in case of motor cars on the reducing balance method.

Other perquisites are taxable only in the hands of the following specified employees; i.e.,

i. Director-employee

ii. Employee having substantial interest in employer-company

iii. Employee drawing salary in excess of Rs. 50,000

The following perquisites are not taxable under CBDT instructions or by virtue of the Act/Rules:

1. The provision of medical facilities as per para 4(i).

2. Free meals provided to all employees in office up to Rs. 50 per employee provided by the employer through paid vouchers usable at eating joints. [However, with the introduction of Fringe Benefit Tax from A.Y. 2006-07, expenditure incurred by an employer on free meals in any case will not be taxed as perquisite in the hands of the employee.]

3. Telephone including mobile phone provided to the employee. [However, with the introduction of Fringe Benefit Tax from A.Y. 2006-07, expenditure incurred by an employer will in any case not be taxed as perquisite in the hands of the employee.]

4. Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India.

5. Sum payable by an employer to pension or deferred annuity scheme.

6. Employer’s contribution to staff group insurance scheme.

7. Actual travelling expenses paid/reimbursed for journeys undertaken for business purposes.

8. Payment of annual premium on personal accident policy, if such policy is taken to safeguard the employer’s interest. See CIT vs. Lala Shri Dhar (1922) 84 ITR 192 (Delhi).

9. Rent-free official residence to a High Court or Supreme Court Judge.

10. Rent-free furnished residence to official of Parliament.

11. Conveyance facility to High Court/Supreme Court Judges.

12. Allotment of shares, debentures or warrants to its employees under ESOP or ESOS. From A.Y. 2008-09 the ESOP or ESOS need not be in accordance with guidelines issued by Central Government.