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CHAPTER – 5
INCOME UNDER THE HEAD “SALARIES”
1. Salary:
 Salary falls due on the last day of each month; or
 Salary falls due on the first day of next month
2. Dearness Allowance
 forming part of salary
 not forming part of salary
3. Commission:
 Fixed % commission on sales achieved by the employee
 Commission other than sales commission
4. Advance Salary:
 Taxable on “receipt” basis
5. Arrears of Salary:
 Taxable on “due” basis. If not taxed on ‘due’ basis then it is taxed on ‘receipt’ basis
6. Allowances:
 Can be only in the form of monetary payment
 Fixed in nature
Different forms of allowances:
 Exemption based on actual expenditure (e.g. HRA)
 Exemption not based on actual expenditure (e.g. education allowance)
 Fully taxable allowances (e.g. lunch allowance)
i) Exemption based on actual expenditure:
a) House Rent Allowance:
 40% of salary (50% in case of metros)
 Actual HRA received
 Rent paid (-) 10% of salary
whichever is less is exempt from tax
note: Salary = Basic + Dearness allowance (forming) + Sales commission
note: If the employee lives in his own house or in a house without paying any rent then H.R.A.
received is fully taxable.
note: No exemption if employee opts for section 115BAC
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b) Travelling / Conveyance / Uniform / Helper Allowance:
 Official Purpose: Exempt
ii) Exemption of allowances not based on actual expenditure:
a) Entertainment Allowance for Government employees:
 Maximum limit: Rs.5,000
 Actual amount received
 20% of Basic
whichever is less is allowed as deduction u.s.16(ii)
note: Exemption is not based on actual expenditure incurred.
note: No exemption for non-Government employees
b) Children’s education allowance:
Amount exempt is Rs.100 per month per child subject to a maximum of two children.
c) Children’s hostel allowance:
Amount exempt is Rs.300 per month per child subject to a maximum of two children.
d) Tribal area allowance:
Amount exempt is Rs.200 per month.
e) Transport allowance (allowance for commuting between residence to office and back):
For disabled employees:
Amount exempt is Rs.3,200 p.m.
For others:
Fully taxable
f) Transport Allowance granted to employees working in any transport system to meet his
personal expenses while on duty: Amount exempt: 70% of allowance received or Rs.10,000
p.m. whichever is less.
iii) Fully taxable allowances: All other allowances like medical, telephone, transport, city
compensatory allowance, special, lunch, tiffin, marriage, servant, gas-electricity-water,
overtime, are fully taxable without any exemption.
note: Allowances paid by the Government of India to an Indian citizen for rendering service
outside India is fully exempt from tax. Section 10 (7).
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Problems on Basics:
1. Discuss the head of income under which the following receipts are assessed to tax.
a. Salary received by a working partner
b. Pension received by the family members after the death of the employee
c. Salary received by MP/MLA
2. Mr.X draws Rs.80,000 p.m. as salary up to 31.08.2022. From 1.9.2022, his salary was increased to
Rs.1,00,000 p.m. Calculate his salary for the previous year 22-23 if it falls due on:
a) last day of each month;
b) first day of next month
3. Mr.A receives Rs.7,20,000 p.a. as net salary in hand. Employer had deducted Rs.36,000 as employees
contribution to provident fund, Rs.42,000 as income tax deducted at source and Rs.2,000 as professional tax.
During the year, employer had deducted Rs.40,000 towards the recovery of house building advance taken by
Mr.A. What will be his actual salary earned?
4. X joins the service in the grade of 30,000--4,000--42,000--5,000--72,000 on 1.6.2017. Compute his basic
salary for the previous year 2022-23.
Problems On House Rent Allowance:
5. X, who resides in Chennai, gets Rs.3,00,000 p.a. as basic salary. He receives Rs.50,000 p.a. as house rent
allowance. Rent paid by him is Rs.40,000 p.a. Find out the taxable amount of HRA.
6. X, a resident of Bangalore, receives Rs.8,00,000 p.a. as basic, Rs.80,000 p.a. as dearness allowance (forming
part of salary) and 10% commission on sales made by him (sales made by X during the previous year is
Rs.12,00,000) and Rs.7,500 p.m. as house rent allowance. He, however, pays Rs.8,000 p.m. as house rent.
Determine the quantum of house rent allowance exempt from tax.
7. Mr.Mohit is employed with XY Ltd., on a basic of Rs.10,000 p.m. He is also entitled to dearness allowance @
100% of basic salary, 50% of which is included in salary as per terms of employment. The company gives him
house rent allowance of Rs.6,000 p.m. which was increased to Rs.7,000 p.m. with effect from 01.01.2023. He
also got an increment of Rs.1,000 p.m. in his basic salary with effect from 1.02.2023.
Rent paid by him during the previous year 2022-23 is as under:
April and May 2022
Nil, as he stayed with his parents
June to October, 2022
Rs.6,000 p.m. for an accommodation in Bangalore
November, 2022 to March, 2023
Rs.8,000 p.m. for an accommodation in Chennai
Compute his income from salary for assessment year 2023-24.
Problems On Allowances:
8. X, a Government employee, gets Rs.4,00,000 p.a. as basic pay. In addition, he receives Rs.72,000 as
entertainment allowance. His actual expenditure on entertainment for official purposes, however, exceeds
Rs.72,000. Calculate taxable amount of entertainment allowance. What would be your answer if he is a
non-government employee.
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9. Mr.X of J Ltd. received the following during the f.y. 22-23: Compute his Income from salary.
Basic Rs.30,000 p.m.; D.A. (forming part of salary) Rs.10,000 p.m.; Bonus one month salary including D.A.;
Entertainment Allowance Rs.1,000 p.m.; Education allowance for his 3 children Rs.75 p.m. per child; Medical
allowance Rs.1,000 p.m.; Transport Allowance Rs.2,500 p.m.; Lunch allowance Rs.600 p.m. Telephone
allowance Rs.600 p.m. Salary arrears relating to previous year 2019-20 Rs.18,000 was received in
September 2022 (this amount was not taxed earlier).
10. X a pilot in Indigo Airlines received Rs.25,000 p.m. as transport allowance to meet his personal expenses
while on duty. Calculate the taxable amount of allowance received.
11. Mr.A, an Indian citizen and a non-resident, is posted in the Indian High Commission at Nairobi during the
Previous Year 2022-23. His emoluments consist of Basic Pay of Rs.4,00,000 per month and overseas
allowance of Rs.50,000 p.m. Besides, he is entitled to & fro journey (air-fare) to India and also use
Government’s car at Nairobi. Compute his Income from Salary.
12. Mr.Srikant has two sons. He is in receipt of children education allowance of Rs.150 p.m. for his elder son and
Rs.70 p.m. for his younger son. Both his sons are going to school. He also receives the following allowances:
a. Transport allowance Rs.1,800 p.m.
b. Tribal area allowance Rs.500 p.m.
Compute his taxable allowances.