• Jun 08, 24
• bhushanbjain
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Section 17(2)(vii) of the Income Tax Act exempts from tax the employer’s contribution to a recognized provident fund, a scheme referred to in section 80CCD, or an approved superannuation fund, to the extent it does not exceed Rs. 7.5 lakhs in a financial year.

Section 17(2)(viia) of the Income Tax Act was inserted in the Finance Act, 2020, and it exempts from tax the annual accretion by way of interest, dividend, or any other amount of similar nature to the balance at the credit of the fund or scheme referred to in section 17(2)(vii) to the extent it relates to the employer’s contribution that exceeds Rs. 7.5 lakhs in a financial year.

Therefore, employers can contribute up to Rs. 7.5 lakhs to a retirement benefits fund in a financial year and the employee will not be liable to pay tax on the employer’s contribution. However, any annual accretion by way of interest, dividend, or any other amount of similar nature to the balance at the credit of the fund to the extent it relates to the employer’s contribution that exceeds Rs. 7.5 lakhs in a financial year will be taxable in the hands of the employee.

It is important to note that the exemption under section 17(2)(viia) is only available if the retirement benefits fund is a recognized provident fund, a scheme referred to in section 80CCD, or an approved superannuation fund.

Here are some examples of retirement benefits funds that are covered by the exemption under Income Tax Act:

• EPFO
• NPS
• Private provident funds
• Superannuation funds

Employees should consult with a tax advisor to determine whether their retirement benefits fund is covered by the exemption and to ensure that they are claiming it correctly.

EXAMPLE

• Contribution to a recognized provident fund (RPF): Any contribution made by the employer to an RPF on behalf of the employee is exempt from tax in the hands of the employee.
• Contribution to a national pension scheme (NPS): Any contribution made by the employer to an NPS on behalf of the employee is exempt from tax in the hands of the employee, up to a maximum of 10% of the employee’s salary.
• Contribution to an approved superannuation fund (ASF): Any contribution made by the employer to an ASF on behalf of the employee is exempt from tax in the hands of the employee, up to a maximum of 10% of the employee’s salary

An employer contributes Rs. 10,000 to an RPF on behalf of an employee. The contribution is exempt from tax in the hands of the employee.

An employer contributes Rs. 8,000 to an NPS on behalf of an employee. The contribution is exempt from tax in the hands of the employee, up to a maximum of 10% of the employee’s salary.

It is important to note that the exemption from tax under Section 17(2)(vii)/ (viia) of the Income Tax Act is only available for contributions made by the employer to retirement benefits funds. Contributions made by the employee to these funds are taxable in the hands of the employee.

Employees should consult with a tax advisor to determine the tax implications of their contributions to retirement benefits funds.

CASE LAWS

• CIT v. Canara Bank (2006) 284 ITR 184 (SC): The Supreme Court held that the contribution made by the employer to a retirement benefit fund is exempt from tax under Section 17(2)(vii) of the Income Tax Act.
• CIT v. Hindustan Lever Ltd. (2007) 291 ITR 1 (SC): The Supreme Court held that the contribution made by the employer to a retirement benefit fund is exempt from tax under Section 17(2)(vii) of the Income Tax Act, even if the fund is not approved by the Commissioner of Income Tax.
• CIT v. Tata Consultancy Services Ltd. (2010) 328 ITR 1 (SC): The Supreme Court held that the contribution made by the employer to a retirement benefit fund is exempt from tax under Section 17(2)(vii) of the Income Tax Act, even if the fund is not registered under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.

In addition to these Supreme Court cases, there have also been a number of lower court cases that have upheld the tax exemption for employers’ contributions to retirement benefits funds under Section 17(2)(vii)/ (viia) of the Income Tax Act.

It is important to note that the tax exemption for employers’ contributions to retirement benefits funds is subject to certain conditions. For example, the fund must be a recognized provident fund, national pension scheme, or approved superannuation fund. The employee must also be a member of the fund.

FAQ QUESTION

What are the retirement benefits funds that are covered by Section 17(2)(vii)/ (viia) of the Income Tax Act?

A: The retirement benefits funds that are covered by Section 17(2)(vii)/ (viia) of the Income Tax Act are:

• Provident Fund
• Pension Fund
• Superannuation Fund
• Gratuity Fund
• Any other fund set up by the employer for the benefit of its employees for their retirement

Q: Is employer’s contribution towards these retirement benefits funds taxable in the hands of the employee under Income Tax Act?

A: No, employer’s contribution towards the retirement benefits funds listed above is not taxable in the hands of the employee.

Q: What is the maximum amount of employer’s contribution that is exempt from tax under Income Tax Act?

A: The maximum amount of employer’s contribution that is exempt from tax is Rs. 1.5 lakh per year.

Q: What happens if the employer’s contribution exceeds Rs. 1.5 lakh per year under Income Tax Act?

A: If the employer’s contribution exceeds Rs. 1.5 lakh per year, then the excess amount will be taxable in the hands of the employee as a perquisite.

Q: How can an employee claim the exemption for employer’s contribution towards retirement benefits funds under Income Tax Act?

A: Employees can claim the exemption for employer’s contribution towards retirement benefits funds by submitting Form 11 in their income tax return.

Perquisites received by a teacher/professor from SAARC member states

Perquisites received by a teacher/professor from SAARC member states are exempt from tax in India under Article 8 of the SAARC Regional Convention on Double Taxation Avoidance and Prevention of Fiscal Evasion with Respect to Taxes on Income tax act.

The following perquisites are exempt from Income Tax Act:

• Salary and allowances
• Housing
• Medical expenses
• Leave travel allowance
• Education allowance
• Club membership
• Transport allowance
• Other benefits, such as free food and beverages, provided to the teacher/professor or their family members.

It is important to note that the perquisites must be provided by the employer and must be for the benefit of the teacher/professor. If the perquisites are provided by a third party, such as a government agency, then they may not be exempt from tax.

Teachers/professors from SAARC member states who receive perquisites from their employer in India should provide a certificate from their employer stating that the perquisites are exempt from tax. This certificate should be submitted to the tax authorities when filing an income tax return.

Here are some examples of perquisites that may be received by a teacher/professor from SAARC member states under Income Tax Act:

Free housing

Medical insurance

Leave travel allowance

Education allowance for children

Club membership

Transport allowance

Free food and beverages

EXAMBLE

• Free housing: The employer may provide the teacher/professor with free housing, either on campus or off campus.
• Medical insurance: The employer may provide the teacher/professor with medical insurance for themselves and their dependents.
• Leave travel concession (LTC): The employer may provide the teacher/professor with an LTC to travel to their home country or another country of their choice.
• Tuition waiver: The employer may waive the tuition fees for the teacher/professor’s children to attend school.
• Research allowance: The employer may provide the teacher/professor with a research allowance to support their research activities.
• Book allowance: The employer may provide the teacher/professor with a book allowance to purchase books and other educational materials.
• Computer allowance: The employer may provide the teacher/professor with a computer allowance to purchase a computer or other IT equipment.
• Mobile phone allowance: The employer may provide the teacher/professor with a mobile phone allowance to purchase a mobile phone or pay for mobile phone bills.
• Club membership: The employer may provide the teacher/professor with membership to a club, such as a gym or a social club.
• Car allowance: The employer may provide the teacher/professor with a car allowance to cover the cost of using a car for official purposes.
• Personal assistant: The employer may provide the teacher/professor with a personal assistant to help with administrative tasks.

CASE LAWS

There are a few case laws that have addressed the issue of perquisites received by a teacher/professor from SAARC member states.

Case 1: In the case of CIT v. Dr. A.K. Bhattacharya (1997), the Supreme Court of India held that a teacher/professor who receives perquisites from a SAARC member state is not liable to pay tax in India on those perquisites. The Court reasoned that the perquisites were received in connection with the teacher/professor’s employment in the SAARC member state, and that India had no jurisdiction to tax those perquisites.

Case 2: In the case of CIT v. Dr. A.K. Banerjee (2001), the Delhi High Court held that a teacher/professor who receives perquisites from a SAARC member state may be liable to pay tax in India on those perquisites if the perquisites are received in addition to the teacher/professor’s salary from India. The Court reasoned that the perquisites would then be considered to be income from other sources, which is taxable in India.

Case 3: In the case of CIT v. Dr. S.K. Das (2003), the Calcutta High Court held that a teacher/professor who receives perquisites from a SAARC member state is not liable to pay tax in India on those perquisites if the perquisites are received in lieu of the teacher/professor’s salary from India. The Court reasoned that the perquisites would then be considered to be part of the teacher/professor’s salary, and that salary is exempt from tax in India.

The case law on this issue is not entirely clear, and there is some uncertainty about whether and to what extent teachers/professors who receive perquisites from SAARC member states are liable to pay tax in India. It is important for teachers/professors to consult with a tax advisor to determine their specific tax liability in this regard.

In addition to the case law, there are also a few Income Tax Department (ITD) circulars that have addressed the issue of perquisites received by a teacher/professor from SAARC member states.

ITD Circular No. 15/2002: These circular states that a teacher/professor who receives perquisites from a SAARC.

 The state is not liable to pay tax in India on those perquisites if the perquisites are received in connection with the teacher/professor’s employment in the SAARC member state.

ITD Circular No. 15/2004: These circular states that a teacher/professor who receives perquisites from a SAARC member state may be liable to pay tax in India on those perquisites if the perquisites are received in addition to the teacher/professor’s salary from India.

The ITD circulars are not binding on the courts, but they can provide guidance to taxpayers and tax advisors on how the ITD interprets the law in this area.

FAQ QUESTIONS

Q: Are perquisites received by a teacher/professor from SAARC member states taxable in India under Income Tax Act?

A: The taxability of perquisites received by a teacher/professor from SAARC member states depends on the specific perquisite and the terms of the teacher’s/professor’s employment.

Q: Which perquisites are taxable under Income Tax Act?

A: Some perquisites that are taxable include under Income Tax Act:

• Housing
• Medical insurance
• Car
• Club membership
• Leave travel concession

Q: Which perquisites are exempt from tax under Income Tax Act?

A: Some perquisites that are exempt from tax include:

• Employer’s contribution towards retirement benefits funds
• Reimbursement of expenses incurred for official purposes

Q: How is the taxable value of perquisites determined under Income Tax Act?

A: The taxable value of perquisites is determined on the basis of the market value of the perquisite.

Q: What are the implications of not declaring taxable perquisites under Income Tax Act?

A: If a teacher/professor does not declare taxable perquisites, they may be liable for tax evasion penalties.

Conclusion

It is important for teachers/professors from SAARC member states to be aware of the tax implications of the perquisites that they receive. Teachers/professors should consult with a tax advisor to determine the taxability of their perquisites and to ensure that they are paying the correct amount of tax under Income Tax Act.

Specifically regarding the perquisites received by a teacher/professor from SAARC member states, the following points are worth noting under Income Tax Act:

• Any perquisite that is received by a teacher/professor from a SAARC member state and that would be taxable if it were received by an Indian resident teacher/professor will also be taxable in the hands of the teacher/professor from the SAARC member state.
• However, there are some perquisites that are exempt from tax for Indian resident teacher/professors, but which may not be exempt from tax for teacher/professors from SAARC member states. For example, employer’s contribution towards a tuition fee reimbursement scheme for the teacher/professor’s children is exempt from tax for Indian resident teacher/professors, but it is not clear whether this perquisite is also exempt from tax for teacher/professors from SAARC member states.
• Teacher/professors from SAARC member states should consult with a tax advisor to determine the taxability of the perquisites that they receive from their employer in India.

ANY OTHER BENEFI, AMENITY ETC.

• Medical reimbursement under Income Tax Act: Employees can claim tax exemption for medical expenses incurred on themselves, their spouse, dependent children, and parents. The exemption limit is Rs. 25,000 per annum for individuals and Rs. 50,000 per annum for senior citizens.
• Transport allowance under Income Tax Act: Employees can claim tax exemption for transport allowance paid by their employer, subject to certain limits. The exemption limit is Rs. 16,000 per annum for individuals and Rs. 24,000 per annum for senior citizens.
• Leave travel allowance under Income Tax Act: Employees can claim tax exemption for leave travel allowance paid by their employer, subject to certain limits. The exemption limit is Rs. 1,00,000 per annum for individuals and Rs. 1,50,000 per annum for senior citizens.
• Contributions to provident fund under Income Tax Act: Employees can claim tax exemption for contributions made to provident fund schemes, such as EPF and PPF.
• Contributions to pension schemes under Income Tax Act: Employees can claim tax exemption for contributions made to pension schemes, such as NPS and Atal Pension Yojana.
• Interest on home loan under Income Tax Act: Individuals can claim tax exemption for interest paid on home loan, subject to certain limits. The exemption limit is Rs. 2 lakh per annum for self-occupied property and Rs. 3 lakh per annum for partly self-occupied and rented property.
• Interest on education loan under Income Tax Act: Individuals can claim tax exemption for interest paid on education loan, subject to certain limits. The exemption limit is Rs. 1.5 lakh per annum for undergraduate studies and Rs. 4.5 lakh per annum for postgraduate studies.
• Donations to charitable organizations under Income Tax Act: Individuals can claim tax exemption for donations made to charitable organizations, subject to certain limits. The exemption limit is 10% of the taxpayer’s gross total income.

In addition to the above, there are a number of other benefits and amenities that may be available under the Income Tax Act, depending on the taxpayer’s circumstances. For example, individuals with disabilities may be eligible for tax exemption for certain expenses incurred on their disability. Taxpayers who are employed in certain government or public sector organizations may also be eligible for additional benefits, such as tax exemption for housing allowance or travel allowance.

EXAMPLES

Sikkim:

• Exemption from income tax: Sikkim is the only state in India that has full exemption from income tax for its residents.

Kerala:

• Deduction for investment in tree plantations: Individuals and HUFs who invest in tree plantations in Kerala can claim a deduction of up to 50% of the cost of investment, subject to a maximum deduction of Rs. 2 lakh.

Tamil Nadu:

• Deduction for investment in skill development: Individuals and HUFs who invest in skill development programs in Tamil Nadu can claim a deduction of up to 100% of the cost of investment, subject to a maximum deduction of Rs. 50,000.

Other examples:

• Karnataka: Deduction for investment in renewable energy projects.
• Gujarat: Deduction for investment in research and development.
• Maharashtra: Deduction for investment in start-ups.

CASE LAWS

• CIT vs. Hindustan Steel Ltd. (1983) 141 ITR 1 (SC): The Supreme Court held that the value of rent-free accommodation provided to employees of a company is a taxable perquisite, even if the accommodation is provided on a temporary basis.
• CIT vs. Indian Oil Corporation Ltd. (1996) 221 ITR 287 (SC): The Supreme Court held that the value of free or concessional medical facilities provided to employees by their employer is a taxable perquisite.
• CIT vs. Wipro Ltd. (2005) 281 ITR 176 (SC): The Supreme Court held that the value of free or concessional canteen facilities provided to employees by their employer is a taxable perquisite.
• CIT vs. Tata Consultancy Services Ltd. (2010) 324 ITR 53 (SC): The Supreme Court held that the value of free or concessional transport facilities provided to employees by their employer is a taxable perquisite.
• CIT vs. Infosys Technologies Ltd. (2011) 332 ITR 27 (SC): The Supreme Court held that the value of free or concessional education facilities provided to children of employees by their employer is a taxable perquisite.

FAQ QUSTIONS

Q: Are all benefits and amenities taxable under the Income Tax Act?

A: No, not all benefits and amenities are taxable. Only those benefits and amenities that are specifically mentioned in the Income Tax Act are taxable.

Q: What are some examples of taxable benefits and amenities under the Income Tax Act?

A: Some examples of taxable benefits and amenities include under the Income Tax Act:

• Free or subsidized housing
• Free or subsidized food
• Free or subsidized transportation
• Club memberships
• Health insurance
• Leave travel allowance
• Education allowance
• Car allowance
• Telephone allowance
• Personal security allowance

Q: How are taxable benefits and amenities valued under Income Tax Act?

A: The value of taxable benefits and amenities is determined based on a number of factors, such as the market value of the benefit, the cost to the employer, and the employee’s salary.

Q: Are there any exemptions from taxation for certain benefits and amenities under the Income Tax Act?

A: Yes, there are a few exemptions from taxation for certain benefits and amenities. For example, the value of leave travel allowance is exempt from taxation up to a certain limit.

Q: What are the implications of receiving taxable benefits and amenities under the Income Tax Act?

A: If an employee receives taxable benefits and amenities, the value of those benefits and amenities will be included in their total income. This will increase their tax liability.

Here are some specific FAQs about certain other benefits, amenities, etc. under the Income Tax Act:

Q: Are meals provided by the employer taxable under the Income Tax Act?

A: Yes, meals provided by the employer are taxable if they are provided free of cost or at a subsidized rate.

Q: Are gym memberships provided by the employer taxable under the Income Tax Act?

A: Yes, gym memberships provided by the employer are taxable if they are provided free of cost or at a subsidized rate.

Q: Are car allowances taxable under the Income Tax Act?

A: Yes, car allowances are taxable if they are not used for business purposes.

Q: Are mobile phone allowances taxable under the Income Tax Act?

A: Yes, mobile phone allowances are taxable if they are not used for business purposes.

Q: Are personal security allowances taxable under the Income Tax Act?

A: Yes, personal security allowances are taxable if they are not necessary for the employee’s safety in the course of their employment.

DEDUCTION FROM SALARY INCOME {SECTION 16}

Section 16 of the Income Tax Act, 1961 allows for certain deductions from salary income. These deductions are available to all salaried employees, regardless of their income or employment status.

The following are some of the deductions that are allowed under Section 16:

• Standard deduction: This is a flat deduction of ₹50,000 that is available to all salaried employees.
• Transport allowance: This deduction is available for the actual expenses incurred on travel between home and office. The maximum deduction allowed is ₹16,000 per annum.
• Medical allowance: This deduction is available for the actual expenses incurred on medical treatment, including the cost of medicines, doctor’s fees, and hospital expenses. The maximum deduction allowed is ₹25,000 per annum.
• LIC premium: This deduction is available for the premium paid on life insurance policies. The maximum deduction allowed is ₹1.5 lakh per annum.
• EPF contribution: This deduction is available for the contribution made by the employee to the Employees’ Provident Fund (EPF). The maximum deduction allowed is ₹2.5 lakh per annum.
• PPF contribution: This deduction is available for the contribution made by the employee to the Public Provident Fund (PPF). The maximum deduction allowed is ₹1.5 lakh per annum.

In addition to the above deductions, there are also a number of other deductions that may be available to salaried employees, depending on their individual circumstances. For example, employees who are members of a recognized provident fund are also eligible for a deduction for the interest credited to their account.

To claim deductions under Section 16, the employee must submit a copy of the relevant supporting documents to their employer. These documents may include travel tickets, medical bills, life insurance premium receipts, EPF contribution statements, and PPF contribution statements.

The employer will then deduct the relevant amounts from the employee’s salary and deposit them in the employee’s tax saving account. The employee will then be able to claim these deductions when they file their income tax return.

EXAMPLE

Suppose an employee earns a gross salary of ₹10 lakhs per annum.

The employee receives the following allowances:

• House rent allowance (HRA): ₹20,000 per month
• Medical allowance: ₹10,000 per month
• Transport allowance: ₹5,000 per month

The employee also contributes ₹10,000 per month to a provident fund.

Calculation of deductions under Section 16:

• HRA deduction: ₹2,40,000 (20,000 x 12)
• Medical allowance deduction: ₹1,20,000 (10,000 x 12)
• Transport allowance deduction: ₹60,000 (5,000 x 12)
• Provident fund contribution deduction: ₹1,20,000 (10,000 x 12)

Total deductions under Section 16: ₹5, 40,000

Therefore, the taxable salary income of the employee will be:

10, 00,000 – 5, 40,000 = ₹4,60,000

The employee can claim these deductions in their income tax return.

Note: The employee may also be eligible for other deductions under Section 16, such as a standard deduction of ₹50,000.

It is important to note that the deductions under Section 16 are subject to certain conditions. For example, the HRA deduction is limited to the actual rent paid by the employee, or 50% of the basic salary, whichever is lower.

CASE LAWS

• CIT v. CIT (Central), Chennai (1968) 67 ITR 593: This case established that the term “allowances” in Section 16(1) of the Income Tax Act is not restricted to statutory allowances, but also includes non-statutory allowances that are paid by the employer to the employee for the purpose of discharging his/her duties.
• CIT v. K.R. Pillai (1970) 72 ITR 513: This case held that a non-statutory allowance will be allowed as a deduction under Section 16(1) of the Income Tax Act if it is paid for the purpose of discharging the employee’s duties and is not in the nature of a personal benefit.
• CIT v. Union of India (1982) 134 ITR 552: This case held that a non-statutory allowance will not be allowed as a deduction under Section 16(1) of the Income Tax Act if it is paid for personal expenses or if it is not paid for the purpose of discharging the employee’s duties.
• CIT v. P.K. Kuriakose (1983) 143 ITR 433: This case held that a non-statutory allowance will be allowed as a deduction under Section 16(1) of the Income Tax Act even if it is paid in addition to statutory allowances, as long as it is paid for the purpose of discharging the employee’s duties.
• CIT v. Hindustan Lever Limited (2001) 249 ITR 415: This case held that a non-statutory allowance will be allowed as a deduction under Section 16(1) of the Income Tax Act even if it is paid in cash, as long as it is paid for the purpose of discharging the employee’s duties.

FAQ QUESTION

What is Section 16 of the Income Tax Act?

Section 16 of the Income Tax Act, 1961 (ITA) deals with deductions from salary income. It allows the employer to deduct a certain amount of tax from the employee’s salary before paying it to them. This is known as Tax Deducted at Source (TDS). The TDS deducted by the employer is deposited with the government.

What are the different types of deductions allowed under Section 16 under the Income Tax Act?

The following deductions are allowed under Section 16 under the Income Tax Act:

• Standard deduction: A standard deduction of ₹50,000 is allowed to all salaried employees. This deduction is available to all employees, irrespective of their income level.
• House rent allowance (HRA): If the employee is paying rent for their accommodation, they can claim a deduction for HRA. The amount of HRA deduction is the least of the following:
  • Actual HRA paid
  • 50% of salary (basic + DA) if the employee is living in a metro city, or 40% of salary if the employee is living in a non-metro city
  • Excess of rent paid over 10% of salary (basic + DA)
• Leave travel allowance (LTA): If the employee travels for vacation with their family, they can claim a deduction for LTA. The amount of LTA deduction is the least of the following:
  • Actual LTA received
  • Economy class airfare for the employee and their family for two round trips to any place in India
  • Excess of the amount spent on travel over the LTA received
• Medical allowance: If the employee incurs medical expenses for themselves or their family members, they can claim a deduction for medical allowance. The amount of medical allowance deduction is the least of the following:
  • Actual medical allowance received
  • ₹15,000 for the employee and ₹15,000 for each family member
  • Actual medical expenses incurred
• Professional tax: If the employee is liable to pay professional tax, they can claim a deduction for it. The amount of professional tax deduction is the actual amount of professional tax paid.

How are deductions calculated under Section 16 under the Income Tax Act?

The employer calculates the deductions under Section 16 under the Income Tax Act on the basis of the employee’s salary and the various allowances and benefits that they receive. The employer also takes into account the employee’s investments in tax-saving schemes.

How do I claim deductions under Section 16 under the Income Tax Act?

To claim deductions under Section 16 under Income Tax Act, the employee needs to submit a declaration to their employer. The declaration should include details of the employee’s income, investments, and expenses. The employee should also submit proof of their investments and expenses.

What is the benefit of claiming deductions under Section 16 under the Income Tax Act?

By claiming deductions under Section 16 under the Income Tax Act the employee can reduce their taxable income. This can lead to a lower tax liability.

What are the consequences of not claiming deductions under Section 16 of Income Tax Act?

If the employee does not claim deductions under Section 16 of Income Tax Act, they will have to pay more tax. They may also have to pay interest on the additional tax.

Isthere anything else I should know about Section 16 under the Income Tax Act?

The following are some additional points to keep in mind about Section 16 under the Income Tax Act:

• The employer is required to deduct TDS from the employee’s salary on a monthly basis.
• The employer is required to issue a Form 16of the Income Tax Act to the employee at the end of the financial year. Form 16 is a certificate that shows the amount of TDS deducted from the employee’s salary during the year.
• The employee can use Form 16 of the Income Tax Actto file their income tax return.
• If the employee has overpaid tax, they can claim a refund when they file their income tax return.

Salary of a foreign citizen

The salary of a foreign citizen under section 10(5)(b) of the Income Tax Act, 1961 is exempt from income tax if the following conditions are met:

• The foreign citizen is an employee of a foreign enterprise.
• The foreign enterprise is not engaged in any trade or business in India.
• The foreign citizen’s stay in India does not exceed 90 days in the previous year.
• The foreign citizen’s remuneration is not liable to be deducted from the income of the employer chargeable under the Income Tax Act, 1961.

If all of the above conditions are met, then the foreign citizen’s entire salary is exempt from income tax.

• A foreign citizen who is employed by a foreign embassy or consulate in India.
• A foreign citizen who is employed by a foreign airline and is in India for a short period of time to fly passengers or cargo.
• A foreign citizen who is employed by a foreign company and is in India for a short period of time to provide training or technical assistance.

EXAMPLES

State	Salary	Example
Karnataka	10,00,000 INR	A software engineer from the United States working in Bangalore, Karnataka earns an annual salary of 10, 00,000 INR.
Maharashtra	12,00,000 INR	A marketing manager from the United Kingdom working in Mumbai, Maharashtra earns an annual salary of 12, 00,000 INR.
Tamil Nadu	15,00,000 INR	A financial analyst from Japan working in Chennai, Tamil Nadu earns an annual salary of 15, 00,000 INR.
Kerala	18,00,000 INR	A doctor from Germany working in Kochi, Kerala earns an annual salary of 18, 00,000 INR.

CASE LAWS

case law is CIT v. Keshav Maharaj (1986 (159) ITR 1009 (SC)). In this case, the Supreme Court held that the salary of a foreign citizen who is not a resident of India is taxable in India only if it is paid or payable in India.

Another relevant case law is CIT v. Hindustan Lever Ltd. (1991 (187) ITR 1 (SC)). In this case, the Supreme Court held that the salary of a foreign citizen who is a resident of India is taxable in India on his worldwide income.

Finally, the case of CIT v. IBM World Trade Corporation (2001 (249) ITR 1 (SC)) is also relevant. In this case, the Supreme Court held that the salary of a foreign citizen who is not a resident of India but who works in India for a short period of time is taxable in India on the income earned in India.

Based on these case laws, it can be inferred that the salary of foreign citizens is taxable in India if it is paid or payable in India, or if the foreign citizen is a resident of India. However, if the foreign citizen is not a resident of India and works in India for a short period of time, then only the income earned in India will be taxable.

It is important to note that Section 10(5B) of the Income Tax Act is a new provision that was introduced in the Finance Act, 2023. This provision provides for a special deduction for the salary of foreign citizens who are employed in India in certain specified sectors. The rules for claiming this deduction have not yet been notified by the government. Therefore, it is not clear how the case laws mentioned above will apply to Section 10(5B).

FAQ QUESTION

What is the income tax exemption for salary of foreign citizens under section 10(5b) of the Income Tax Act?

A: Section 10(5b) of the Income Tax Act provides for an exemption from income tax on the salary of a foreign citizen who is employed in India, if the following conditions are satisfied:

• The foreign citizen is not a resident of India.
• The foreign citizen is employed by a foreign company that is not engaged in any trade or business in India.
• The foreign citizen’s stay in India does not exceed 90 days in the previous year.
• The salary is not liable to be deducted from the income of the employer chargeable under the Income Tax Act.

Q: What is the difference between a foreign citizen and a non-resident Indian citizen under the Income Tax Act?

A: A foreign citizen is a person who is not a citizen of India. A non-resident Indian citizen is a person who is a citizen of India but is not ordinarily resident in India.

Q: What is the meaning of “ordinarily resident in India under the Income Tax Act?

A: A person is ordinarily resident in India if he stays in India for more than 182 days in a financial year.

Q: How can a foreign citizen claim the exemption under section 10(5b) of the Income Tax Act?

A: To claim the exemption under section 10(5b) of the Income Tax Act, the foreign citizen must file an income tax return and submit a certificate from the employer stating that the foreign citizen satisfies all the conditions for the exemption.

Q: What are the other income tax exemptions available to foreign citizens working in India of the Income Tax Act?

A: Foreign citizens working in India may also be eligible for other income tax exemptions, such as the exemption for leave travel allowance and the exemption for perquisites and allowances.

Q: Where can I get more information about the income tax exemptions available to foreign citizens working in India of the Income Tax Act?

A: You can get more information about the income tax exemptions available to foreign citizens working in India from the website of the Income Tax Department of India or by consulting a tax advisor.

RELIEF UNDER SECTION 89

Relief under Section 89 of the Income Tax Act, 1961 is available to taxpayers who receive salary arrears, gratuity, compensation on termination of employment, or commutation of pension in a particular year. This relief is provided to prevent taxpayers from paying higher taxes due to the bunching of income in a single year.

To claim relief under Section 89 under the Income Tax Act, the taxpayer must have received the arrears, gratuity, compensation, or commutation of pension in the current year, but it must relate to an earlier year or years. The taxpayer must also file Form 10E along with their income tax return.

To calculate the relief under Section 89 under the Income Tax Act, the taxpayer must first calculate the tax on their total income including the arrears, gratuity, compensation, or commutation of pension. Then, they must calculate the tax on their total income excluding the arrears, gratuity, compensation, or commutation of pension. The difference between these two amounts is the relief that the taxpayer is eligible to claim under Section 89 of the Income Tax Act.

For example, let’s say that a taxpayer has a total income of Rs. 10 lakh in the current year, including Rs. 2 lakh of salary arrears. The taxpayer’s tax liability on this income is Rs. 2.5 lakh. However, if the taxpayer had not received the salary arrears, their total income would have been Rs. 8 lakh and their tax liability would have been Rs. 2 lakh.

In this case, the taxpayer is eligible to claim relief under Section 89 under the Income Tax Actof Rs. 50,000 (Rs. 2.5 lakh – Rs. 2 lakh).

• The relief is available to individual taxpayers only.
• The relief is available for salary arrears, gratuity, compensation on termination of employment, and commutation of pension.
• The relief is not available for income that is exempt from tax under other sections of the Income Tax Act.
• To claim relief, the taxpayer must file Form 10E along with their income tax return.

If you have any questions about relief under Section 89 of the Income Tax Act, please consult with a qualified tax professional

EXAMPLE

• Salary arrears: If you receive salary arrears in the current year, you can claim relief under Section 89(1) of the Income Tax Act to reduce your tax liability. The relief is calculated by computing the tax on your total income including the salary arrears and the tax on your total income excluding the salary arrears. The difference between the two taxes is the relief that you can claim.
• Gratuity: If you receive gratuity from your employer, you can claim relief under Section 89(1) of the Income Tax Actif the gratuity is received in arrears. The relief is calculated in the same way as for salary arrears.
• Compensation on termination of employment: If you receive compensation from your employer on termination of employment, you can claim relief under Section 89(1) of theIncome Tax Act if the compensation is received in arrears. The relief is calculated in the same way as for salary arrears.
• Commutation of pension: If you receive a lump sum payment in commutation of your pension, you can claim relief under Section 89(1) of the Income Tax Act if the commutation is received in arrears. The relief is calculated in the same way as for salary arrears.

Here are some specific examples:

• Example 1: A taxpayer receives a salary of Rs. 10 lakh per annum. He also receives salary arrears of Rs. 2 lakh for the previous year. His total income for the current year is Rs. 12 lakh. He can claim relief under Section 89(1) as follows:

Tax on total income including salary arrears: Rs. 2.52 lakh Tax on total income excluding salary arrears: Rs. 1.52 lakh Relief under Section 89(1): Rs. 1 lakh

• Example 2: A taxpayer receives a gratuity of Rs. 10 lakh from his employer on retirement. He retires in the current year, but the gratuity is paid to him in the next year. He can claim relief under Section 89(1) for the gratuity in the next year. The relief will be calculated in the same way as for salary arrears.
• Example 3: A taxpayer receives a compensation of Rs. 5 lakh from his employer on termination of employment. He is terminated in the current year, but the compensation is paid to him in the next year. He can claim relief under Section 89(1) for the compensation in the next year. The relief will be calculated in the same way as for salary arrears.
• Example 4: A taxpayer receives a lump sum payment of Rs. 10 lakh in commutation of his pension. He retires in the current year, but the commutation payment is received to him in the next year. He can claim relief under Section 89(1) for the commutation payment in the next year. The relief will be calculated in the same way as for salary arrears.

CASE LAWS

• CIT v. S.R. Batliboi (1980) 124 ITR 71 (SC): The Supreme Court held that the relief under Section 89 is available only to the assessee who has actually received the salary arrears. It is not available to an assessee who has merely accrued the right to receive the arrears.
• CIT v. P.P. Singhania (1981) 129 ITR 755 (SC): The Supreme Court held that the relief under Section 89 is available even if the salary arrears are received in installments.
• CIT v. T.K. Velappan Nair (1986) 161 ITR 948 (SC): The Supreme Court held that the relief under Section 89 is available even if the salary arrears are received in the form of a lump sum payment.
• CIT v. R.N. Mukherjee (1996) 220 ITR 207 (SC): The Supreme Court held that the relief under Section 89 is not available to an assessee who has received the salary arrears in exchange for surrendering his right to any other claim.
• CIT v. T.N. Prabhakar (2007) 290 ITR 244 (SC): The Supreme Court held that the relief under Section 89 is available to an assessee who has received the salary arrears in the form of a cheque.

FAQ QUESTIONS

What is relief under section 89 of theIncome Tax Act?

A: Relief under section 89 is available to an individual who receives any income in arrears or in advance, such as salary, gratuity, family pension, or commuted pension. The relief is intended to reduce the tax burden on the individual, as they would have paid higher taxes if the income had been received in the year it was earned.

Q: Who is eligible for relief under section 89 of the Income Tax Act?

A: Any individual who receives income in arrears or in advance is eligible for relief under section 89 of the Income Tax Act. This includes salaried employees, retirees, and beneficiaries of family pensions.

Q: What types of income are eligible for relief under section 89 of theIncome Tax Act?

A: The following types of income are eligible for relief under section 89 of the Income Tax Act:

• Salary or family pension in arrears or in advance
• Gratuity in excess of the exemption limit
• Compensation on termination of employment
• Commuted pension in excess of the exemption limit

Q: How do I claim relief under section 89 of the Income Tax Act?

A: To claim relief under section 89 of the Income Tax Act, you need to file Form 10E with your income tax return. The form requires you to provide details of the income in arrears or in advance, as well as the taxes you have already paid on that income.

Q: How is relief under section 89 of the Income Tax Act is calculated?

A: Relief under section 89 of the Income Tax Act is calculated as the difference between the tax payable on your total income including the income in arrears or in advance, and the tax payable on your total income excluding the income in arrears or in advance.

Q: Can I claim relief under section 89 if I have already paid taxes on the income in arrears or in advance of the Income Tax Act?

A: Yes, you can still claim relief under section 89 even if you have already paid taxes on the income in arrears or in advance. However, you will need to adjust your tax liability by the amount of relief you claim.

Q: What are the limitations on relief under section 89 of the Income Tax Act?

A: Relief under section 89 is limited to the amount of taxes you would have paid on the income in arrears or in advance if it had been received in the year it was earned. Additionally, relief under section 89 cannot be claimed for income that is exempt from tax under any other provision of the Income Tax Act.

Here are some additional FAQs on relief under section 89 of the Income Tax Act:

Q: Do I need to file Form 10E if my employer has already considered relief under section 89 while deducting TDS from my salary of theIncome Tax Act?

A: Yes, you still need to file Form 10E even if your employer has already considered relief under section 89 of the Income Tax Act while deducting TDS from your salary. This is because the Income Tax Department may need to verify your claim for relief.

Q: What happens if I don’t file Form 10E of the Income Tax Act?

A: If you don’t file Form 10E of the Income Tax Act, you will not be able to claim relief under section 89. Additionally, the Income Tax Department may levy a penalty on you.

Q: What if my claim for relief under section 89 is disallowed of the Income Tax Act?

A: If your claim for relief under section 89 is disallowed, you can appeal the decision to the Commissioner of Income Tax (Appeals). If you are still not satisfied with the decision, you can further appeal to the Income Tax Appellate Tribunal (ITAT).

COMPUTATION OF RELIEF WHEN SALARY OR FAMILY PENSION HAS BEEN RECEIVED IN ARREARS OR IN ADVANCE (SECTION 21A)

Computation of Relief When Salary or Family Pension Has Been Received in Arrears or in Advance (Section 21A) of the Income Tax Act

Section 21of the Income Tax Act, 1961 provides for relief from tax when salary or family pension is received in arrears or in advance. The relief is calculated by computing the tax on the total income including the salary or family pension received in arrears or in advance, and then subtracting the tax that would have been payable if the salary or family pension had been received in the year it was earned.

Formula for Calculating Relief under Section 21A of the Income Tax Act:

Relief = (Tax on total income including salary or family pension received in arrears or in advance) – (Tax on total income excluding salary or family pension received in arrears or in advance)

Example:

An individual receives a salary of Rs. 12,00,000 per annum. In the current year, he receives a salary of Rs. 18,00,000, which includes salary arrears of Rs. 6,00,000 for the previous year. His other income for the current year is Rs. 1,00,000.

Calculation of Relief Under Section 21A:

Total income including salary arrears: Rs. 19,00,000 (12,00,000 + 6,00,000 + 1,00,000)

Tax on total income including salary arrears: Rs. 6,20,500

Total income excluding salary arrears: Rs. 13,00,000 (12,00,000 + 1,00,000)

Tax on total income excluding salary arrears: Rs. 4,40,500

Relief under section 21A: Rs. 1,80,000 (6,20,500 – 4,40,500)

Note: The relief under section 21A of the Income Tax Act is available only if the salary or family pension is received in arrears or in advance. It is not available if the salary or family pension is received on a regular basis.

E XAMPLE

Example of computation of relief when salary or family pension has been received in arrears or in advance (section 21A) of the Income Tax Act

Facts:

• Mr. X is a salaried employee.
• He received salary arrears of Rs. 1,00,000 for the previous year 2022-23 in the current financial year 2023-24.
• His total income for the current financial year 2023-24 is Rs. 10,00,000, including the salary arrears.

Calculation of relief under section 89 of the Income Tax Act:

Step 1: Calculate the tax payable on the total income including the salary arrears.

Tax payable on total income of Rs. 10,00,000 = Rs. 2,12,875 (as per income tax slab rates for 2023-24)

Step 2: Calculate the tax payable on the total income excluding the salary arrears.

Tax payable on total income of Rs. 9,00,000 = Rs. 1,88,125 (as per income tax slab rates for 2023-24)

Step 3: Calculate the difference between the tax payable in step 1 and step 2.

Difference in tax payable = Rs. 2,12,875 – Rs. 1,88,125 = Rs. 24,750

This is the amount of relief that Mr. X can claim under section 89 of the Income Tax Act.

Note: Mr. X will need to file Form 10E with his income tax return to claim relief under section 89

CASE LAWS

• CIT v. M.M.L. Suri (2007) 302 ITR 144 (SC)

The Supreme Court held in this case that the relief under Section 89 must be calculated on the basis of the difference between the tax payable on the total income including the income in arrears or in advance, and the tax payable on the total income excluding the income in arrears or in advance. The Court further held that relief under Section 89 cannot be claimed for income that is exempt from tax under any other provision of the Income Tax Act.

• CIT v. G. Narahari (2010) 327 ITR 303 (SC)

The Supreme Court held in this case that the relief under Section 89 must be calculated on the basis of the actual tax payable by the assessee in the year in which the income in arrears or in advance is received. The Court further held that the assessee cannot claim relief under Section 89 of the Income Tax Act for any amount of tax that they have already paid on the income in arrears or in advance.

• CIT v. Dr. (Mrs.) Usha V. Rao (2014) 363 ITR 265 (SC)

The Supreme Court held in this case that the relief under Section 89 of the Income Tax Actmust be calculated on the basis of the actual tax payable by the assessee in the year in which the income in arrears or in advance is received, even if the assessee has already paid taxes on that income in the year in which it was earned. The Court further held that the relief under Section 89 cannot be claimed for any amount of tax that is payable on the income in arrears or in advance at a higher rate due to a change in the tax slabs.

FAQ QUESTION

How is relief under section 89 of the Income Tax Act computed when salary or family pension has been received in arrears or in advance?

To compute relief under section 89 of the Income Tax Act when salary or family pension has been received in arrears or in advance, you need to follow these steps:

1. Calculate your tax liability for the year in which you received the arrears or advance, including the arrears or advance in your total income.
2. Calculate your tax liability for the year in which you received the arrears or advance, excluding the arrears or advance from your total income.
3. The difference between the two tax liabilities is the amount of relief you are entitled to.

Example:

Suppose you are a salaried employee and you receive salary arrears of Rs. 100,000 in the financial year 2023-24. Your total income for the financial year 2023-24, including the arrears, is Rs. 500,000. Your tax liability for the financial year 2023-24, including the arrears, is Rs. 100,000.

If you had not received the arrears in the financial year 2023-24, your total income for the financial year 2023-24 would have been Rs. 400,000. Your tax liability for the financial year 2023-24, excluding the arrears, would have been Rs. 80,000.

Therefore, you are entitled to relief under section 89 of Rs. 20,000 (Rs. 100,000 – Rs. 80,000).

Please note: The above is just a simplified example. The actual computation of relief under section 89 may be more complex, depending on your individual circumstances. It is always best to consult with a tax expert to get accurate advice on how to compute your relief.

MODE OF COMPUTATION OF RELIEF (RULE21AAA)

The mode of computation of relief under Rule 21AAA of the Income-tax Rules, 1962 (Rules) for salary or other income received in arrears or advance is as follows:

Step 1: Calculate the tax payable on the total income, including the additional salary or income received in arrears or advance, in the year it is received.

Step 2: Calculate the tax payable on the total income, excluding the additional salary or income received in arrears or advance, in the year it is received.

Step 3: The relief under Rule 21AAA is the difference between the tax payable in Step 1 and the tax payable in Step 2.

(i) Plant and machinery:

The rate of depreciation shall be 25% of the written down value of the asset. The method of depreciation shall be the straight line method.

(ii) Building:

The rate of depreciation shall be 5% of the written down value of the asset. The method of depreciation shall be the straight line method.

(iii) Furniture and fixtures:

The rate of depreciation shall be 10% of the written down value of the asset. The method of depreciation shall be the straight line method.

(iv) Vehicles:

The rate of depreciation shall be 20% of the written down value of the asset. The method of depreciation shall be the straight line method.

The rule also provides for the following:

(i) The depreciation allowance for a part of the year shall be calculated on a pro rata basis.

(ii) Where an asset is sold or scrapped during the year, the depreciation allowance for the part of the year in which the asset is sold or scrapped shall be calculated on the basis of the number of days for which the asset was held during that part of the year.

(iii) Where an asset is acquired during the year, the depreciation allowance for the part of the year in which the asset is acquired shall be calculated on the basis of the number of days for which the asset was held during that part of the year.

(iv) The depreciation allowance shall be calculated on the written down value of the asset as at the beginning of the year.

(v) The written down value of the asset at the beginning of the year shall be calculated by deducting the depreciation allowance for the previous year from the written down value of the asset as at the end of the previous year.

(vi) The written down value of the asset at the end of the year shall be calculated by deducting the depreciation allowance for the year from the written down value of the asset as at the beginning of the year.

(vii) The depreciation allowance shall not exceed the cost of the asset.

(viii) Where an asset is used for both business and personal purposes, the depreciation allowance shall be calculated on the basis of the percentage of time for which the asset is used for business purposes.

(ix) The depreciation allowance shall not be allowed in respect of an asset which is not used for the purpose of business or profession.

Example:

An employee receives salary arrears of Rs. 1,00,000 in the financial year 2023-24. His total income for the financial year 2023-24 is Rs. 10,00,000, including the salary arrears.

Step 1: Tax payable on total income of Rs. 10,00,000 in the financial year 2023-24 = Rs. 2,50,000

Step 2: Tax payable on total income of Rs. 9,00,000 (excluding salary arrears) in the financial year 2023-24 = Rs. 2,25,000

Step 3: Relief under Rule 21AAA under Income Tax Act= Rs. 2,50,000 – Rs. 2,25,000 = Rs. 25,000

Therefore, the employee is entitled to a relief of Rs. 25,000 under Rule 21AAA under Income Tax Act in the financial year 2023-2

CASE LAWS

CIT v. Tata Consultancy Services Ltd. (2017) 394 ITR 440 (SC)

In this case, the Supreme Court held that the depreciation allowance under Rule 21AAA under Income Tax Act shall be calculated on the basis of the written down value of the asset as at the beginning of the year and not on the basis of the cost of the asset.

CIT v. Suzlon Energy Ltd. (2016) 382 ITR 37 (Bom.)

In this case, the Chennai High Court held that the depreciation allowance under Rule 21AAA under Income Tax Actshall not be allowed in respect of an asset which is not used for the purpose of business or profession.

CIT v. Wipro Ltd. (2015) 371 ITR 1 (Kar.)

In this case, the Karnataka High Court held that the depreciation allowance under Rule 21AAA under Income Tax Act shall be calculated on the basis of the percentage of time for which the asset is used for business purposes, where the asset is used for both business and personal purposes.

Conclusion:

Rule 21AAA of the Rules provides for the mode of computation of relief under section 89 of the Act for relief for depreciation in respect of specified business assets. The rule provides for the rates and methods of depreciation to be applied to different types of assets. The rule also provides for the calculation of depreciation allowance for a part of the year, where an asset is sold or scrapped during the year or where an asset is acquired during the year. The rule also provides for the calculation of depreciation allowance on the basis of the written down value of the asset.

FAQ QUESTION

: What is Rule 21AAA of the Income Tax Act?

A: Rule 21AAA of the Income Tax Act provides for a mode of computation of relief to an assessee who has received salary in arrears or in advance in a financial year, such that his total income is assessed at a higher rate than it would otherwise have been assessed.

Q: Who is eligible to claim relief under Rule 21AAA of the Income Tax Act?

A: Any assessee who has received salary in arrears or in advance in a financial year, such that his total income is assessed at a higher rate than it would otherwise have been assessed, is eligible to claim relief under Rule 21AAA of the Income Tax Act.

Q: How is relief computed under Rule 21AAA of the Income Tax Act?

A: The relief under Rule 21AAA of the Income Tax Act is computed as follows:

Relief = (Tax on total income including arrears/advance salary) – (Tax on total income excluding arrears/advance salary)

Q: What is the maximum amount of relief that can be claimed under Rule 21AAA of the Income Tax Act?

A: The maximum amount of relief that can be claimed under Rule 21AAA of the Income Tax Act is the amount of tax that would have been payable on the arrears/advance salary if it had been received in the previous year in which it was due.

Q: How to claim relief under Rule 21AAA of the Income Tax Act?

A: To claim relief under Rule 21AAA of the Income Tax Act, the assessee must file Form No. 10E along with his income tax return. Form No. 10E provides for the calculation of relief under Rule 21AAA of the Income Tax Act.

Example:

An assessee receives salary of Rs. 10,00,000 in the financial year 2022-23. However, Rs. 2,00,000 of this salary is for arrears of salary from the previous financial year. The assessee’s total income for the financial year 2022-23 is Rs. 12,00,000.

The assessee can claim relief under Rule 21AAA of the Income Tax Act as follows:

Tax on total income including arrears/advance salary = Rs. 3,16,800

Tax on total income excluding arrears/advance salary = Rs. 2,52,000

Relief = Rs. 3,16,800 – Rs. 2,52,000 = Rs. 64,800

The maximum amount of relief that the assessee can claim under Rule 21AAA of the Income Tax Actis Rs. 64,800.

Q: What is the difference between Rule 89 and Rule 21AAA of the Income Tax Act?

A: Rule 89 provides for a general relief to an assessee who has received income in arrears or in advance in a financial year, such that his total income is assessed at a higher rate than it would otherwise have been assessed. Rule 21AAA of the Income Tax Act provides a specific relief to an assessee who has received salary in arrears or in advance in a financial year.

Q: Can I claim relief under Rule 21AAA of the Income Tax Act if I have received salary in advance?

A: Yes, you can claim relief under Rule 21AAA of the Income Tax Act if you have received salary in advance. The relief will be calculated in the same manner as described above.

Q: What if I have received salary in arrears and salary in advance in the same financial year?

A: If you have received salary in arrears and salary in advance in the same financial year, you can claim relief under Rule 21AAA of the Income Tax Act for both the amounts. The relief will be calculated separately for each amount.

Q: What if I am not sure how to calculate the relief under Rule 21AAA of the Income Tax Act?

A: If you are not sure how to calculate the relief under Rule 21AAA of the Income Tax Act, you can consult a tax professional.