Income Tax 2016-17 – Exempted Income – Income not included under the Head Salaries

Income Tax 2016-17 – Exempted Income  – Income not included under the Head Salaries – Exempted Income under Finance Act 2016

Income Tax Department has issued a Circular on 02.01.2017 in respect of Salaried Income Tax. This article covers the Exempted Income under Finance Act 2016

Any income falling within any of the following clauses shall not be included in computing the income from salaries for the purpose of section 192 of the Act :-

The value of any travel  concession    or  assistance  received by or due to an  employee  from his employer or former employer for himself and his family, in connection with his proceeding (a) on leave to any place in India or (b) after retirement from service, or, after termination   of   service   to any place in India is exempt under Section 10(5) subject, however, to the conditions prescribed in Rule 2B of the Rules.
For the purpose of this clause, “family” in relation to an individual means: (i)  the spouse and children of the individual;  and
(ii) the parents, brothers and sisters of the individual or any of them, wholly or   mainly dependent on the
individual.

It may also be noted that the amount exempt under this clause  shall  in  no case exceed the amount  of  expenses actually incurred for the purpose of such travel.

Death-cum-retirement  gratuity or any other gratuity is exempt to the extent  specified  from inclusion in computing the total income under Section 10(10). Any death-cum-retirement gratuity received under the revised Pension Rules of the Central Government or, as the case may be, the Central Civil Services (Pension) Rules, 1972, or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority or any payment of retiring gratuity received under the Pension Code or Regulations applicable to the members of the defence service is exempt. Gratuity received in cases other than those mentioned above, on retirement, termination etc is exempt up to the limit as prescribed by the Board. Presently the limit is Rs. 10 lakhs w.e.f. 24.05.2010 [Notification no. 43/2010 S.O. 1414(E) F.No. 200/33/2009- ITA-1 dated 11th June 2010].

Any payment in commutation of pension received under   the Civil Pensions (Commutation) Rules of the Central Government or under any similar scheme applicable   to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all- India services or to the members of the defence services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority] or a corporation established by a Central, State or Provincial Act, is exempt under Section10(10A)(i). As regards payments in commutation  of  pension received under any scheme  of  any other employer, exemption  will  be  governed by the  provisions of section 10(10A)(ii). Also, any payment in commutation of pension from a fund referred to in Section 10(23AAB) is exempt under Section 10(10A)(iii).

Any payment received by an employee of the Central Government or a State Government, as cash-equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement, whether on superannuation or otherwise, is exempt under Section 10(10AA)(i).   In the case of other employees, this exemption will be determined with reference to the leave to their credit at the time of retirement on  superannuation or otherwise, subject  to a maximum of ten months’ leave. This exemption will be   further limited   to   the   maximum amount   specified by the Government of India Notification No.S.O.588(E) dated 31.05.2002 at Rs. 3,00,000/- in relation to such employees who retire, whether on superannuation or otherwise, after 1.4.1998.

Under Section 10(10B), the retrenchment compensation  received by a workman is exempt from income-tax  subject to certain limits. The maximum amount of retrenchment compensation exempt is the sum calculated on the basis provided  in section 25F(b) of the Industrial Disputes Act, 1947 or  any amount not less than Rs.50,000/- as the Central  Government may  by notification  specify in  the Official  Gazette, whichever is less.  These limits shall not apply in  the  case where the compensation is paid under  any scheme  which  is  approved  in this behalf  by  the  Central    Government,  having regard to the need for extending  special protection  to  the workmen in the undertaking to  which  the scheme applies and other relevant circumstances. The maximum limit of such payment is Rs. 5,00,000/- where retrenchment is on or after 1.1.1997 as specified in Notification No.
10969 dated 25-06-1999.

Under Section 10(10C), any payment received or receivable (even if received in installments) by an employee of  the following  bodies at  the  time  of  his voluntary  retirement  or  termination of his  service, in accordance with any scheme or schemes of voluntary retirement or in the case of public sector company, a scheme of voluntary separation, is exempt from income-tax to the extent  that such amount does not exceed Rs. 5,00,000/-:

a)           A public sector company;
b)           Any other company;
c)           An Authority established under a Central, State or Provincial Act;
d)           A Local Authority;
e)           A Cooperative Society;
f)           A university established or incorporated or under a Central, State or Provincial Act, or, an Institution declared to be a University under section 3 of the University Grants Commission Act, 1956;
g)           Any Indian Institute of Technology within the meaning of Section 3 (g) of  the Institute of Technology Act,
1961;
h)          Such    Institute  of   Management  as  the Central  Government may by notification in the  Official  Gazette, specify  in  this behalf.

The exemption  of  amount  received  under  VRS  has been extended  to  employees  of  the  Central Government and  State Government and employees of notified institutions having importance throughout India or any State or States. It may also be noted that where this exemption has been allowed to any employee for any assessment year, it shall not be allowed  to  him  for any  other  assessment  year. Further, if relief has been allowed under section 89 for any assessment year in respect of amount received on voluntary retirement or superannuation, no exemption under section 10(10C) shall be available.

Any sum received under a Life Insurance Policy (Sec 10(10D), including  the  sum allocated by way of bonus on such policy other  than the following is exempt under section 10(10D):
i)           any sum received under   section 80DD(3)  or section 80DDA(3);  or ii)          any sum received under a Keyman insurance policy; or
iii)         any sum received under an insurance policy issued on or after 1.4.2003, but on or before 31-03-2012, in respect of which the premium payable for any of the years during the term of the policy exceeds 20 percent of the actual capital sum assured; or
iv)         any sum received under an insurance policy issued on or after 1.4.2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 10 percent of the actual capital sum assured; or
v)           any sum received under an insurance policy issued on or after 1.4.2013 in cases of persons with disability or
person with severe disability as per Sec 80U or suffering from disease or ailment as specified in Sec 80DDB, in respect of which the premium payable for any of the years during the term of the policy exceeds 15 percent of the actual capital sum assured

However, any sum received under such policy referred to in (iii), (iv) and (v) above, on the death of a person would be exempt.

Any  payment from a Provident Fund to  which  the Provident  Funds Act, 1925, applies or from any other  provident fund set up by the Central Government and notified by it in the Official Gazette is exempt under section 10(11).

Under section 10(13A) of the Act, any special  allowance specifically granted to an  assessee by his  employer to meet expenditure incurred on payment of rent (by  whatever  name called) in respect of  residential  accommodation  occupied  by the assessee  is exempt from Income-tax to the extent as may be prescribed,  having regard to the area or place in which such accommodation is situated and other relevant considerations.  According  to  Rule 2A  of  the  Rules,  the  quantum  of exemption allowable  on  account  of  grant of special  allowance to meet expenditure on payment of rent shall be the least of the following:

(a)         the actual amount of such allowance received by the assessee in respect of the relevant period i. e. the period during which the accommodation was occupied by the assesse during the financial year;  or
(b)         the actual expenditure incurred in payment of rent in  excess  of  one-tenth  of the salary  due  for  the relevant period;  or
(i) where  such  accommodation is situated in  Bombay, Calcutta,  Delhi or Madras, 50% of the salary  due to the employee for the relevant period;  or
(ii) where  such accommodation is situated in any other places,  40% of the salary due to the employee  for the relevant period.

For this purpose, “Salary” includes dearness allowance, if the terms of employment so provide, but excludes all other  allowances and perquisites.

It  has to be noted that only the expenditure  actually incurred  on  payment  of rent in  respect  of  residential  accommodation occupied  by  the assessee  subject  to  the limits  laid down in Rule 2A, qualifies for exemption  from income-tax. Thus,  house rent allowance  granted  to  an employee  who  is residing in a house/flat owned by him  is not exempt  from  income-tax.  The disbursing authorities should satisfy themselves in this regard by insisting on production of  evidence of actual payment of  rent before excluding the House Rent Allowance or any portion  thereof from the total income of the employee.

Though  incurring actual expenditure on payment of rent is a  pre-requisite  for claiming deduction under section 10(13A), it has been decided as an administrative  measure that  salaried employees drawing house rent allowance  upto Rs.3000/-  per  month will be exempted from  production  of rent  receipt. It  may,  however, be  noted  that  this concession  is  only  for the purpose of tax-deduction  at source, and, in the regular assessment of the employee, the Assessing  Officer will be free to make such enquiry as he deems  fit for the purpose of satisfying himself that  the employee  has incurred actual expenditure on  payment  of  rent.

Further if annual rent paid by the employee exceeds Rs 1,00,000 per annum, it is mandatory for the employee to report PAN of the landlord to the employer. In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee.

Section 10(14)  provides for exemption of the following allowances :-

(i)   Any special  allowance  or benefit granted  to  an employee  to  meet  the expenses wholly, necessarily and exclusively incurred   in   the performance of his duties as prescribed under Rule 2BB   subject to the extent to which such expenses are actually incurred for that purpose.
(ii)  Any  allowance  granted to an employee  either  to meet  his  personal expenses at the place  of  his posting  or at the place he ordinarily resides  or to  compensate  him  for  the  increased  cost  of living, which may be prescribed and to the extent as may be prescribed.

However, the allowance referred to in (ii) above should not be in the nature of a personal allowance granted to the assessee  to remunerate or compensate him  for performing duties  of  a  special  nature relating to  his office  or  employment unless such allowance is related to his place of posting or residence.

The  CBDT has prescribed guidelines for the purpose  of Section 10(14) (i) & 10 (14) (ii)  vide notification No.SO 617(E) dated
7th July, 1995 (F.No.142/9/95-TPL)which has been amended vide  notification SO No.403(E)   dt 24.4.2000  (F.No.142/34/99- TPL). The transport allowance granted  to  an  employee to meet his expenditure  for  the purpose of commuting between the place of his residence and the place  of duty is exempt to the extent of  Rs. 1600 p. m. or Rs 3200 p.m. (for a person who is blind or deaf and dumb or is orthopaedically handicapped with disabilities of lower extremes) vide  notification  S.O.No. 395(E) dated
13.05.98 r/w S.O. No. 1002 (E) dated 13.04.2015 & S.O. No. 2604 (E) dated 23.09.2015.

5.3.11     Under Section 10(15)(iv)(i) of the Act, interest  payable by the Government on deposits made by  an employee of the Central Government or a State Government or a public   sector  company  out  of  his  retirement benefits,  in  accordance with such scheme framed  in  this  behalf  by  the  Central  Government and  notified  in  the  Official   Gazette   is  exempt     from income-tax.  By  notification No.F.2/14/89-NS-II dated 7.6.89, as amended by notification No.F.2/14/89-NS-II dated 12.10.89, the Central Government   has notified a scheme called Deposit Scheme for Retiring Government Employees, 1989 for the purpose of the said clause.

Any scholarship granted to meet the cost of education is not to be included in total income as per provisions of section 10(16) of the Act.

Section 10(18) provides for exemption of any income by way of pension received by an individual who has  been  in the service  of  the  Central Government or State Government and has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or  such other  gallantry award as may be specifically notified by the Central Government. Family pension received by any member of the family of such individual is also exempt [Notifications No.S.O.1948(E) dated 24.11.2000 and 81(E) dated 29.1.2001, which are enclosed as per Annexure VIII & IX]. “Family” for this purpose shall have the meaning assigned to it in
Section 10(5) of the Act.

DDO may not deduct any tax in the case of recipients of such awards after satisfying himself about the veracity of the claim.

Under  Section 17 of the Act, exemption from  tax will also be available in respect of:-

(a)  the  value  of  any medical treatment provided  to  an  employee  or any member of his family, in any hospital maintained by the employer;
(b) any sum  paid  by the employer  in  respect  of    any expenditure actually incurred by the employee on  his medical treatment
or of any member of his family:

(i)   in any hospital maintained by the Government or any local   authority or any other hospital approved   by the
Government  for  the purposes  of   medical treatment of its employees;
ii) in respect of the prescribed diseases or ailments as provided in Rule 3A(2) of the Rules  in any hospital  approved  by the  Chief Commissioner having regard to the prescribed guidelines as provided in Rule 3(A)(1)of the Rules,

(c)  premium  paid  by the employer in respect  of  medical insurance taken for his employees (under any scheme approved by the Central Government or Insurance Regulatory and Development Authority) or   reimbursement of insurance premium to the employees who take medical insurance  for themselves or for their family  members (under any scheme approved by the Central Government or Insurance Regulatory and Development Authority);

(d) reimbursement, by the employer, of the amount spent by an employee in obtaining medical treatment for himself or   any member  of his family from  any doctor, not exceeding in the aggregate Rs.15,000/- in an year;

(e) As  regards  medical  treatment abroad,  the  actual expenditure  on  stay  and  treatment  abroad  of  the  employee  or  any member of his family, or,  on  stay abroad  of one attendant who accompanies the  patient, in  connection  with such treatment, will be  excluded from  perquisites  to  the  extent  permitted  by the Reserve Bank of India. It may be noted that  the  expenditure incurred on travel abroad by the patient/attendant, shall  be  excluded  from   perquisites  only  if  the  employee’s  gross  total income, as computed  before including  the said expenditure, does not exceed  Rs.2 lakhs.

For    the    purpose   of     availing    exemption    on expenditure incurred on medical treatment, “hospital” includes a dispensary or clinic or nursing home, and  “family” in relation to an individual  means  the  spouse  and  children  of  the individual.   Family also  includes  parents,  brothers  and sisters  of  the individual if they are wholly or  mainly   dependent on the individual.

It is pertinent to mention that benefits specifically exempt u/s 10(13A), 10(5), 10(14), 17 etc.  of the Act would continue to be exempt. These include benefits  like house rent allowance, leave travel concession, travel expense allowance on tour and transfer, daily allowance to meet tour expenses as prescribed, medical facilities  subject to conditions.

In this connection it is to be noted that as per sec. 10 (14) read wit rule 2BBany allowance granted to meet the cost of travel on tour or on transfer includes any sum paid in connection with transfer, packing and transportation of personal effects o such transfer shall be exempt. Also any allowance, whether, granted for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence form his normal place of duty shall be exempt.

Also read the other provisions of Income Tax 2016-17 for Salaried Class – CBDT Circular dated 02.01.2017

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Click here to Calculate Income Tax 2016-17 (Assessment Year 2017-18)

Click here to Calculate the Income Tax Relief under Section 89 for 7th Pay Commission Arrears

Download CBDT Circular F.No. 275/192/2016-IT(B) dated 02.01.2017