Income-tax is levied on an assessee’s total income. Such total income has to be computed as per the provisions contained in the Income-tax Act, 1961. Steps 1 to 8 given hereunder have to be followed for computing total income of an individual assessee. Thereafter, steps 9 to 15 have to be followed for computing the tax payable.

Step 1 – Determination of residential status

The residential status of an individual has to be determined to ascertain which income is to be included in computing the total income.

In the case of an individual, the duration for which he is present in India in the relevant previous year or relevant previous year and the earlier previous years, as the case may be, determine his residential status.

An individual can be either a –

• Resident and ordinarily resident
• Resident but not ordinarily resident
• Non-resident

An individual who is a citizen of India, having total income, other than the income from foreign sources, exceeding ₹ 15 lakh during the previous year, would be deemed resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. Such deemed resident would, by default, be a resident but not ordinarily resident in India in that previous year.

The residential status of an individual determines the scope of his taxable income.

For example, income which accrues outside India and is received outside India is taxable in the hands of a resident and ordinarily resident but is not taxable in the case of a non-resident. In the case of a resident but not ordinarily resident, such income would be taxable only if it is derived from a business controlled in India or profession set up in India.

Step 2 – Classification of income under different heads

An individual may earn income from different sources. Under the Income- tax Act, 1961, for computation of total income, all income of an individual assessee can be classified into five different heads of income.

There are five heads of income, namely, -

• Salaries,
• Income from house property,
• Profits and gains of business or profession
• Capital Gains
• Income from other sources

The income of an assessee should be identified and grouped under the respective head of income.

Each head of income has a charging section (for example, section 15 for salaries, section 22 for income from house property).

Deeming provisions are also contained under certain heads, by which specific items are sought to be taxed under those heads.

For example, unrealized rent and arrears of rent from house property would be deemed to be income from house property in the hands of the recipient individual even if he is not the owner of the house property at the time of receipt of such amount.

The charging section and the deeming provisions would help you to determine the scope of income chargeable under a particular head.

Step 3 – Computation of income under each head

Income is to be computed in accordance with the provisions governing a particular head of income.

Assess the income under each head by -

• applying the charging and deeming provisions,
• excluding items of income relating to that head in respect of which specific exemptions are provided in section
  • There are certain incomes which are wholly exempt from income-tax. These incomes have to be excluded and will not form part of Gross Total Income. For e.g. agricultural income which is exempt under both the tax regimes.
  • Also, some incomes are partially exempt from income-tax. These incomes are excluded while computing income under the relevant head only to the extent of the limits specified in the Act. For e.g. House Rent Allowance, Children Education Allowance are exempt upto prescribed limits under the optional tax regime as per normal provisions of the Act. However, there is no exemption for these allowances under the default tax regime under section 115BAC.
• allowing the permissible deductions under that head, and
• For example, while calculating income from house property of a rented house property, municipal taxes paid by the owner and interest on loan are allowed as deduction. Standard deduction of upto ₹ 50,000 is allowed under salaries. Similarly, deductions and allowances are prescribed under other heads of income.

• disallowing the non-permissible
  • For example, while computing income under the head “Profits and gains from business or profession” expenditure of personal nature and expenditure which is in the nature of offence are not allowable as deduction. Hence, such expenditure, if any, debited to profits and loss account, has to be added back while computing income under this head.
  • Likewise, while computing net consideration for capital gains, brokerage is a permissible deduction from gross sale consideration but securities transaction tax paid is not permissible.

In this step, it is necessary to consider whether the individual is paying tax under the default tax regime or exercising the option to shift out of the default tax regime and pay tax under the optional tax regime as per the normal provisions of the Certain deductions which are allowable under the normal provisions of the Act are not permissible under the default tax regime, for example, additional depreciation, investment linked tax deduction under section 35AD, contribution to scientific research association, national laboratory, IIT etc. However, expenditure on in-house scientific research related to the business of the assessee is allowable as deduction under both the tax regimes.

Step 4 – Clubbing of income of spouse, minor child etc.

An individual in a higher tax bracket may have a tendency to divert his income to another person who is not subject to tax or who is in a lower tax bracket.

For example, an individual may make a fixed deposit in the name of his minor son, so that income from such deposit would accrue to his son, who does not have any other income.

In order to prevent evasion of income-tax by such means, clubbing provisions have been incorporated in the Income-tax Act, 1961, under which income arising to certain persons (like spouse, son’s wife ) have to be included in the income of the person who has diverted his income to such persons for the purpose of computing tax liability.

Further, income of a minor child, not being a minor child suffering from any disability of the nature specified in section 80U (other than income derived from exercise of special skills/talent or manual work done by him) is includible in the hands of the parent whose total income is higher before including minor’s income. Such income will be included in the hands of the parent and if that parent has exercised the option to shift out of the default tax regime and pays tax under normal provisions of the Act, exemption of up to ₹ 1,500 under section 10(32) would be provided from that income.

Step 5 – Set-off or carry forward and set-off of losses

An individual may have different sources of income under the same head of income. He may have profit from one source and loss from the other. Similarly, he can have loss under one head of income and profits under another head of income. There are provisions in the Act for allowing inter-source and inter-head adjustment.

• Inter-source set-off of losses
  • A person may have income from one source and loss from another source under the same head of For instance, a person may have profit from wholesale trade of merchandise and loss from the business of plying vehicles.
  • The loss of one business can be set-off against the profits of another business to arrive at the net income under the head “Profits and gains of business or profession”. However, loss from speculation business can be set-off only against profits from speculation business and not any other business.
  • Set-off of loss from one source against income from another source within the same head of income is permissible, subject to certain exceptions, like long-term capital loss cannot be set-off against short- term capital gains though short-term capital loss can be set-off against long-term capital gains.
• Inter-head set-off of losses
  • Likewise, set-off of loss from one head against income from another head is also permissible, subject to certain exceptions, like business loss cannot be set-off against salary income; loss under the head “Capital Gains” cannot be set-off against any other head of income.
  • Loss from house property cannot be set-off against any other head of income, if the individual pays tax under the default tax regime under section 115BAC. If the individual exercises the option to shift out of the default tax regime and pays tax under normal provisions of the Act, loss from house property can be set-off against income under any other head only to the extent of ₹ 2 lakhs. The remaining loss from house property has to be carried forward to the subsequent year to be set-off against income from house property in that year.
• Carry forward and set-off of losses
  • Unabsorbed losses of the current year can be carried forward to the next year for set-off only against the respective head of income.
  • Here again, if there are any restrictions relating to inter-source set-off, the same will apply, like long-term capital loss which is carried forward can be set-off only against long-term capital gains and not short-term capital gains of a later year.
  • The maximum number of years up to which any particular loss can be carried forward is also provided under the Act.
  • For example, business loss can be carried forward for a maximum of 8 assessment years to be set-off against business income. However, loss from specified business referred to in section 35AD can be carried forward indefinitely for set-off against profits of any specified business.

It must be noted that loss from an exempt source cannot be set-off against profits from a taxable source of income.

Example: Share of loss from a partnership firm cannot be set-off against sole proprietary business income of the partner, since share of income of the firm is exempt under section 10(2A).

Step 6 – Computation of Gross Total Income

The income computed under each head, after giving effect to the clubbing provisions and provisions for set-off and carry forward and set-off of losses, have to be aggregated to arrive at the gross total income.

The process of computing GTI is depicted hereunder -

Add income computed under each head →  Apply clubbing provisions → Apply the provisions for set-off and carry forward of losses

Step 7 – Deductions from Gross Total Income

Certain deductions are allowable from gross total income to arrive at the total income. These deductions are contained in Chapter VI-A. These deductions are allowable if the individual exercises the option to shift out of the default tax regime and pay tax under normal provisions of the Act, subject to satisfaction of the conditions prescribed in the relevant sections.

• Deduction in respect of certain payments, for example,

• Deduction in respect of certain incomes, for example,

• Deduction in respect of other incomes

• Other Deductions
  • Deduction under section 80U in case of a person with disability
  • In addition, deduction is also allowable under section 10AA in respect of an assessee who derives profits and gains from an undertaking which manufactures or produces articles or things or provides any service in any SEZ on or before 31.3.2021 if the individual exercises the option to shift out of the default tax regime and pay tax under normal provisions of the Act.
  • There are limits in respect of deduction under certain sections. The payments/incomes are allowable as deduction subject to such limits. For example, the maximum deduction under section 80RRB is ₹ 3 lakhs; under section 80TTA is ₹10,000 and under section 80TTB is ₹ 50,000.

Note - Deduction under section 80CCD(2) [Employer’s contribution to pension scheme of Central Government], section 80CCH(2) [Central Government’s contribution to assessee’s account in Agniveer Corpus Fund] and section 80JJAA would be available if the eligible assessee pays tax at concessional rates of tax u/s 115BAC under the default tax regime.

Step 8 – Computation of Total income

The gross total income as reduced by the above deductions under Chapter VI-A and section 10AA is the total income.

Total income = GTI – Deductions under Chapter VI-A and section 10AA

It should be rounded off to the nearest multiple of ₹ 10.

Tax is calculated on the total income of the assessee.

Step 9 – Application of the rates of tax on the total income in case of an individual

Concessional tax rates under default tax regime under section 115BAC of the Income-tax Act, 1961

For individuals, there is a slab rate and basic exemption limit. At present, the basic exemption limit is ₹ 3,00,000 under the default tax regime. The rates of tax and level of total income are as under –

Tax rates prescribed by the Annual Finance Act under the optional tax regime (regular provisions of the Act)

The slab rates for A.Y. 2024-25 applicable to Individual under normal provisions of the Act are as follows:

The rates of tax have to be applied on the total income to compute the tax liability.

Rates of tax in respect of certain incomes are provided under the Income- tax Act, 1961 Slab rates are not applicable under both the tax regimes in respect of such incomes. For instance, the rates of tax for long term capital gains on certain assets, long term capital gain on other assets, certain short term capital gains, winnings from lotteries, crossword puzzles, races and winnings from online games etc. are prescribed in sections 112A, 112, 111A, 115BB and 115BBJ, respectively. The rates of tax are 10%, 20%, 15%, 30% and 30%, respectively, in the above cases. Under section 112A, long term capital gains exceeding ₹ 1,00,000 on transfer of equity shares of a company or unit of equity oriented fund or a unit of a business trust is taxable @10%.

The special rates of tax have to be applied on the respective component of total income and the general slab rates have to be applied on the balance of total income as per the tax regime in which he pays tax.

The unexhausted basic exemption limit can, however, be adjusted against long-term capital gains taxable under section 112/112A and short-term capital gains taxable under section 111A in case of resident individual in both the tax regime.

Step 10 – Surcharge/ Rebate under section 87A

Surcharge: Surcharge is an additional tax payable over and above the income- tax. Surcharge is levied as a percentage of income-tax.

In case the assessee pays tax under default tax regime under section 115BAC

The rates of surcharge applicable for A.Y.2024-25, in case the individual assessee pays tax under default regime under section 115BAC, are as follows:

In case the assessee exercises the option to shift out of the default regime

The rates of surcharge applicable for A.Y.2024-25, in case the individual assessee exercises the option to shift out of the default regime, are as follows:

Marginal relief would also be available under both the tax regimes to ensure that the increase in amount of tax payable (including surcharge) due to increase in total income of an assessee beyond the prescribed limit should not exceed the amount of increase in total income.

Rebate under section 87A: Section 87A provides a rebate from the tax payable by an assessee, being an individual resident in India.

Rebate to resident individual paying tax under default regime u/s 115BAC

• If total income of such individual does not exceed ₹ 7,00,000, the rebate shall be equal to the amount of income-tax payable on his total income for any assessment year or an amount of ₹ 25,000, whichever is less.
• If total income of such individual exceeds ₹ 7,00,000 and income-tax payable on such total income exceeds the amount by which the total income is in excess of ₹ 7,00,000, the rebate would be as follows.

Step 1 – Total income (-) ₹ 7 lakhs (A)

Step 2 - Compute income-tax payable on total income (B)

Step 3 - If B>A, rebate under section 87A would be a B – A.

Rebate to resident individual paying tax under optional tax regime (normal provisions of the Act

If total income of such individual does not exceed ₹ 5,00,000, the rebate shall be equal to the amount of income-tax payable on the total income for any assessment year or an amount of ₹ 12,500, whichever is less.

However, rebate under section 87A is not available in respect of tax payable @10% on long-term capital gains taxable under section 112A.

Step 11 – Health and Education cess (HEC) on Income-tax

The amount of income-tax as increased by the union surcharge, if applicable, should be further increased by an additional surcharge called the “Health and Education cess on income-tax”, calculated at the rate of 4% of such income-tax and surcharge, if applicable. Health and education cess is leviable in the case of all assessees i.e. individuals, HUF, AOP/BOI, firms, local authorities, co-operative societies and companies.

It is leviable to fulfill the commitment of the Government to provide and finance quality health services and universalised quality basic education and secondary and higher education

Total  Tax Liability of an individual = Tax on total income at applicable rates [(+)  Surcharge, at applicable rates, if total income > ₹ 50 lakhs,  or (-) Rebate u/s 87A] (+) HEC@4%

Step 12 – Alternate Minimum Tax (AMT)

The Income-tax Act, 1961 contains profit-linked and investment-linked deductions in order to encourage investment in various industries and infrastructure facilities. Taxpayers who exercise the option to shift out of the default tax regime under section 115BAC and are eligible to claim such deductions end up paying no income-tax or marginal income-tax though they are capable of paying higher taxes. It has to be kept in mind that our Government also needs regular/consistent inflow of tax, which is one of its major source of revenue, to fund various expenses for the welfare of the country. Hence, in order to ensure payment of reasonable tax by such zero-tax paying/marginal-tax paying entities, the concept of alternate minimum tax has been introduced in the Income-tax Act, 1961.

Chapter XII-BA contains the special provisions for levy of alternate minimum tax in case of persons other than a company. Any person other than a company, who has claimed deduction under any section (other than section 80P) included in Chapter VI-A under the heading “C – Deductions in respect of certain incomes” or under section 10AA or investment-linked deduction under section 35AD would be subject to AMT [Section 115JEE(1)].

The provisions of AMT would, however, not be applicable to an individual, HUF, AOPs, BOIs, whether incorporated or not, or artificial juridical person, if the adjusted total income of such person does not exceed ₹ 20 lakh [Section 115JEE(2)].

Individual/ HUF/ AoP/ BoI and artificial juridical person, paying tax under default tax regime under section 115BAC, are also not liable to alternate minimum tax under section 115JC.

Note - At intermediate level, since profit-linked deductions provided under section 80-IA to 80-IE, section 80JJA, 80LA, 80M, 80P and 80PA have been excluded from the scope of syllabus by way of Study Guidelines and computation of total income and tax liability is restricted to individual assessees only, the discussion in relation to AMT in this chapter is limited with respect to deduction under section 10AA, section 35AD and deduction under section 80JJAA, 80QQB & 80RRB only.

Accordingly, where the regular income-tax payable by a person for a previous year computed as per the normal provisions of the Income-tax Act, 1961 is less than the AMT payable for such previous year, the adjusted total income shall be deemed to be the total income of the person. Such person shall be liable to pay income-tax on the adjusted total income @18.5% plus surcharge, if applicable, and HEC @4% [Section 115JC].

“Adjusted total income” would mean the total income before giving effect to Chapter XII-BA as increased by

• the deductions claimed, if any, under section 10AA;
• the deduction claimed under section 35AD, as reduced by the depreciation allowable under section 32, as if no deduction under section 35AD was allowed in respect of the asset for which such deduction is claimed; and
• deduction under any section included in Chapter VI-A under the heading C- Deductions in respect of certain incomes [For Intermediate level, the relevant sections are 80JJAA, 80QQB & 80RRB].

Tax credit for AMT [Section 115JD]

Tax credit is the excess of AMT paid over the regular income-tax payable under the provisions of the Income-tax Act, 1961 for the year. Such tax credit shall be carried forward and set-off against income-tax payable in the later year to the extent of excess of regular income-tax payable under normal the provisions of the Act over the AMT payable in that year. The balance tax credit, if any, shall be carried forward to the next year for set-off in that year in a similar manner.

AMT credit can be carried forward for set-off upto a maximum period of 15 assessment years succeeding the assessment year in which the credit becomes allowable.

Tax Credit allowable even if Adjusted Total Income does not exceed ₹ 20 lakh in the year of set-off [Section 115JEE(3)]

In case where the assessee has not claimed any deduction under section 10AA or section 35AD or deduction under section 80JJAA, 80QQB & 80RRB in any previous year and the adjusted total income of that year does not exceed ₹ 20 lakh, it would still be entitled to set-off his brought forward AMT credit in that year.

Tax credit not allowable to the assessee paying tax under the default tax regime

A person who is paying tax under the default tax regime under section 115BAC would not be eligible to claim AMT credit.

Step 13 – Examine whether to pay tax under default regime under section 115BAC or pay tax under the optional tax regime as per the regular provisions of the Act

In case of an assessee not having income from business or profession

In case of individuals not having income from business or profession, the total income and tax liability may be computed every year, both in accordance with default tax regime under section 115BAC and regular provisions of the Act (including provisions relating to AMT, if applicable), in order to determine which is more beneficial and accordingly, decide whether or not to shift out of the default regime under section 115BAC.

In effect, such individual can choose whether or not to exercise the option of shifting out in each previous year. He may choose to pay tax under default regime under section 115BAC in one year and exercise the option to shift out of default tax regime in another year.

In case of an assessee having income from business or profession:

In case of individuals having income from business or profession, the total income and tax liability may be computed, both in accordance with default tax regime under section 115BAC and regular provisions of the Act (including provisions relating to AMT, if applicable), in order to determine which is more beneficial.

Such individual has an option to shift out/opt out of the default tax regime under this section and the option has to be exercised on or before the due date specified under section 139(1) for furnishing the return of   income for such previous year and once such option is exercised, it would apply to subsequent assessment years.

Such person who has exercised the above option of shifting out of the default regime for any previous year shall be able to withdraw such option only once and pay tax under the default regime under section 115BAC for a previous year other than the year in which it was exercised.

Thereafter, such person shall never be eligible to exercise option under this section, except where such person ceases to have any business income in which case, option under (i) above would be available.

Step 14 – Credit for advance tax, TDS and TCS

Tax is deductible at source at the time of payment of salary, rent, interest, fees for professional services, royalty etc.

The payer has to deduct tax at source at the rates specified in the respective sections.

Such tax deducted at source has to be reduced by the payee to determine his net tax liability.

Tax is collectible by the seller in case of certain goods at the rate specified in the respective Credit of such tax collection at source is allowable to determine the tax liability.

The Income-tax Act, 1961 also requires payment of advance tax in instalments during the previous year itself on the basis of estimated income, if the tax payable, after reducing TDS/TCS, is ₹ 10,000 or more.

Individual is required to pay advance tax in four instalments, on or before 15^th June, 15^th September, 15^th December and 15th March of the financial year.

Assessees declaring profits under presumptive taxation provisions under section 44AD or under section 44ADA can, however, pay the entire advance tax on or before 15^th March of the financial year.

From the total tax due, deduct the TDS, TCS and advance tax paid for the relevant assessment year to arrive at the tax payable.

Tax Payable = Total tax liability – TDS – TCS - Advance tax paid

Step 15 - Tax Payable/ Tax Refundable

After adjusting the advance tax, tax deducted and collected at source, the assessee would arrive at the amount of net tax payable or refundable. Such amount should be rounded off to the nearest multiple of ₹ 10. The assessee has to pay the amount of tax payable (called self-assessment tax) before or at the time of filing of the return. Similarly, if any refund is due, assessee will get the same after filing the return of income.

Note: Students are advised to read the above steps carefully and follow the given procedure while solving problems on computation of total income and tax liability.

The definition of salary is very wide and includes not only monetary salary but also benefits and perquisites in kind. Under the default tax regime under section 115BAC, the only deduction available under section 16 in respect of salary income is the standard deduction of upto ₹ 50,000. However, under the optional tax regime as per normal provisions of the Act, the deductions available under section 16 in respect of salary income are the standard deduction upto ₹ 50,000, deduction for entertainment allowance (only for government employees) and deduction for professional tax. The following are some of the aspects which can be considered for tax planning in regard to salary income -

(1) Salary Structure: An employer may plan the salary structure of employees keeping in view the deductions and exemptions available under the Act. If salary is paid as a consolidated amount, without any break-up, the amount of salary after providing standard deduction of ₹ 50,000, would become taxable without any further exemption and Therefore, the employer may structure the salary by including various allowances and perquisites in addition to basic salary, so as to enable the employee to optimise his tax liability.

For example, the employer may include allowances as part of the salary structure of the employees for which exemption can be claimed under Rule 2BB if the employee exercises the option to shift out of the default tax regime , eg. Children education allowance, hostel allowance, house rent allowance. The employer will get a deduction of all the above amounts paid while computing his profits and gains of business or profession.

Further, if the employee exercises the option to shift out of the default tax regime, the employer can give such allowances like special compensatory allowance, border area allowance or remote area allowance or difficult area allowance or disturbed area allowance depending upon the place of posting of the employee. Some exemptions are available in respect of these allowances. In this connection, Rule 2BB specifies the exempt allowances. The employer has to make a careful study and fix the salary structure in such a manner that it will include allowances which are exempt.

Standard deduction of ₹ 50,000 or the amount of gross salary, whichever is less, is allowed as deduction under section 16(ia) under both the tax regimes.

(2) Employees’ welfare schemes: There are several employees’ welfare schemes such as recognised provident fund, approved superannuation fund, gratuity Payments received from such funds by the employees are totally exempt or exempt upto significant amounts.

For example, gratuity received by an employee covered under the Payment of Gratuity Act, 1972 is exempt upto ₹ 20 lakh. The provident fund received by the employee from recognised provident fund is exempt, subject to limits and conditions. The employer can institute such welfare schemes for the benefit of the employees. Such amount contributed by the employer towards the above funds is deductible. However, a note of caution is necessary here in view of the restrictive provisions of section 40A(9) which disallows any contribution made to any welfare funds except where such contributions are covered by section 36(1)(iv)/(iva)/(v) or as required by or under any other law for the time being in force. Further, the employer can contribute to recognized provident fund account of the employee upto 12% of salary, and the same would not be taxable in the hands of the employees. The amount or aggregate of amounts of any contribution made in a recognised provident fund, in NPS referred to in section 80CCD(1) and in an approved superannuation fund by the employer to the account of the assessee, to the extent it exceeds ₹ 7,50,000, would be taxable as perquisite in the hands of the employee. Likewise, if an employee’s contribution to RPF exceeds ₹ 2,50,000 p.a. or ₹ 5,00,000 p.a. (on or after 1.4.2021), as the case may be, depending on whether the employer contributes to RPF, then, interest accured on the amount exceeding the specified threshold would be taxable. 

(3) Insurance policies: Any payment made by an employer on behalf of an employee to maintain a life policy will be treated as perquisite in the hands of the Further, payments received from the employer in respect of key man insurance policies constitute income in the hands of the employees. However, any sum reimbursed by the employer in respect of any mediclaim premium paid by the employee to keep in force an insurance on his health or the health of any member of his family under any scheme approved by the Central Government or IRDA for the purpose of section 80D is not a perquisite in the hands of the employee.

Further, the payment of premium by the employer on behalf of the employee will not be treated as a perquisite in the case of accident insurance policies. This is due to the fact that the employer has a vested interest in the safety of the life of his employee who is engaged in such dangerous occupations.

In respect of accident insurance policies, the term perquisite applies to only such sums in regard to which there was an obligation on the part of the employer to pay and a vested right on the part of the employee. If the employee has no vested interest in the policy, it cannot be considered as a perquisite. In cases where an employer takes out accident insurance policy covering all workmen and staff members and pays insurance premium and whenever any worker/staff member meets with an accident and the amount of claim is received from the insurance company and the same is paid away by the employer to the said worker or his family members, the premium paid by the employer in respect of group accident policies could not be considered as a perquisite, under section 17 to be added in the salary income of any employee. The amount received from insurance company on accident or death by employee or his dependents will not also be in the nature of income but a capital receipt and therefore the same will not be taxable.

(4) Dearness allowance, dearness pay: The employer should ensure that dearness allowance and dearness pay should form part of “salary”. This is because certain items like employer’s contribution to the recognised provident fund, commuted pension etc. are calculated on the basis of salary. Therefore, if dearness allowance, dearness pay are included in salary, the above benefits will also increase leading to higher terminal benefits in the hands of the employee.

Also, for determining the exemption in respect of employer’s contribution to provident fund, house rent allowance etc., dearness allowance forming part of pay for retirement benefits is included within the meaning of “Salary”.

(5) Leave travel facility: If the employee exercises the option to shift out of the default tax regime, the employer should extend leave travel facility. Under section 10(5) of the Income-tax Act, 1961, exemption is provided in the hands of the employee in respect of leave travel Such exemption is available for the employee, spouse, children (upto a maximum of 2 children), dependent parents, dependent brothers and dependent sisters.

However, if the employee pays tax under the default tax regime under section 115BAC, exemption under section 10(5) would not be available.

(6) Rent free accommodation / House Rent Allowance (HRA): An employee should analyse the tax incidence of a perquisite and an allowance, whenever he is given an option, in order to choose the one which is more beneficial to In the case of Rent Free Accommodation vs. HRA, it must be noted that the perquisite of rent free accommodation is taxed as per Rule 3(1) of the Income-tax Rules, 1962 and HRA is exempt to the extent mentioned in section 10(13A) read with Rule 2A. However, exemption for HRA would be available only if the employee exercises the option to shift out of the default tax regime. The employee should therefore work out his tax liability and net cash flow under both the options and then, decide on whether to receive HRA or choose a rent free accommodation.

(7) Uncommuted/Commuted pension: Uncommuted pension is fully Therefore, the employees should get their pension commuted. Commuted pension is fully exempt from tax in the case of government employees and partly exempt from tax in the case of non-government employees.

(8) Provident Fund: Accumulated balance due and becoming payable to an employee participating in a Recognized Provident Fund (RPF) would be exempt, where an employee who is a member of a recognised provident fund and who resigns after completing five years of continuous service.

However, if he resigns before completing five years of continuous service he should ensure that he joins an organisation which maintains a recognised provident fund. The accumulated balance of the provident fund with the previous employer will be exempt from tax provided the same is transferred to the new employer who also maintains a recognised provident fund.

It may be noted the exemption would not be available in respect of income by way of interest accrued during the previous year to the extent it relates to the amount or the aggregate of amounts of contribution made by the employee exceeding ₹ 2,50,000/₹ 5,00,000, as the case may be, in any previous year in that fund, on or after 1st April, 2021 and computed in prescribed manner.

(9) Other retirement benefits: Incidence of tax on retirement benefits like leave encashment, commuted pension, accumulated balance of unrecognized provident fund is lower if they are paid in the beginning of the financial year.

The employer and the employees may mutually plan in such a way that retirement takes place in the beginning of a financial year.

(10) Tax free perquisites: The following are the perquisites which are exempt from tax–

• Use of computers and laptop by employee;
• Medical facility in employer’s own hospital or a public hospital or Government or other approved hospital;
• Educational benefit in a school run by employer provided value of benefit does not exceed ₹ 1,000 per month per child.

(11) Considerations for salary structuring: The perquisite valuation rules prescribe the method for valuing the various perquisites provided by the employer to his employees on the basis of the cost of such perquisites to the For a detailed study, students are advised to refer to the Unit 1 of Chapter 3 - ‘Salaries’. Accordingly, the entire salary structuring for employees will have to be done after carefully weighing the pros and cons of paying salary in monetary terms or allowing the benefit of perquisites in kind to the employees.

It may be noted that a salaried person has an option to choose whether to pay tax under the default tax regime under section 115BAC or shift out of the default tax regime and pay tax under normal provisions of the Act in each previous year.

Under section 115BAC, in respect of his total income, he cannot not avail certain exemptions/deductions like Leave Travel Concession, HRA, exemption under section 10(14) (other than those allowable under this section), interest on housing loan on self-occupied property, deductions under Chapter VI-A [other than under section 80CCD(2), 80CCH(2) and section 80JJAA] etc. The exemptions allowable under section 10(14) under the default tax regime under section 115BAC include travelling allowance, daily allowance, conveyance allowance and transport allowance to blind/deaf and dumb/orthopedically handicapped employee.

Therefore, a salaried taxpayer not availing the above deductions/ exemptions or availing a lesser amount of such deductions/ exemptions can analyse his tax liability under default tax regime under section 115BAC vis-à-vis the regular provisions of the Income-tax Act, 1961 in each year. An employee intending to shift out of the default tax regime under section 115BAC has to intimate the same to the employer.