INCOME FROM SALARY
INTRODUCTION : - Salary as commonly understood, means a fixed
payment mode periodically as compensation for regular ‘service
rendered. It covers wages paid for manual work, salary paid for clerical
jab and remuneration paid to executives and managers. It includes all
sums paid by an employer to an employee by way of basic salary,
allowances, perquisites etc.
Who is taxable :-
1.
a)
Employer-Employee relationship :Salary means the remuneration received by an
employee from his employer for services rendered. Only
on individual can earn salary since only an individual can
render personal service. Any individual who received
remuneration from his employer is liable to be taxed on his
income from salary. For a payment to be regarded as
salary, it is essential that the relationship between the payer
and the payee is that of an employee and employer or
master and servant. The payee must be working under a
contract of service and not a contract for service. Payment
received by an individual from a person other than an
employer is not taxable as salaries. Thus, examination fees
received by an professor from his collage are taxable as
salaries. But examination fees received by the same
professor from the university are taxable as income from
other sources.
An employee may be a full-time or part-time
employee. Further, he may be an ordinary resident, nonresident or resident but not ordinarily resident in India. The
employer, on the other hand, may be an person,
E.g.:- An individual, a firm, company, government,
local authority, foreigner etc.
b)
Remuneration of director :The remuneration received by a director from a
company is taxable as salary. If the director is an employee
of the company in term of a contract of employment or the
Articles of Association. Otherwise it is taxable as income
from business or income from other sources depending
upon the fact of each case.
c)
Remuneration of partner :Any salary , bonus, commission or remuneration
due to or received be a partner from the firm is not to be
regarded as salaries [sec.15] such amounts are taxable as
profits from business in the hands of the partner.
d)
Remuneration of M.P. / M.L.A. :The salaries and allowances of Member of
Parliament (M.P.) or a member of legislative assembly
(M.L.A.) are taxable as income from other sources and not
under the head “salaries” since the M.P. and M.L.A. is not
an employee of the government or the parliament or the
assembly.
e)
Salary can be received from different employers :Salary can be received from past employer, present
employer, feature employer.
Past employer - pension
Present employer - regular salary
Feature employer - advance salary
f)
Salary and wages are one an the same.
g)
Salary can be received in cash or in any kind.
h)
2.
Salary can be taxable on due basis or receipt basis
whichever is earlier.
When is salary taxable [basic of charge]
[sec. 15] :a)
Legal provision :According to sec. 15, the following income shall
chargeable to tax under the head “salaries”
I. Any salary due from an employer of former employer
to an assessee in the previous year, whether paid not;
II. Any salary paid or allowed to him ], in the previous
year, by or on behalf an employer or former employer,
through not due or before it become due to him;
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III. Any arrears of salary paid or allowed in the previous
year, by or on behalf of employer or former employer,
if not charged to income tax in any earlier previous
year.
b)
I.
II.
III.
IV.
V.
VI.
VII.
3.
comments :Salary is taxable on due or received basis whichever
is earlier. It means that if salary is due in the previous
year is taxable whether received or not.
Same salary cannot be taxed twice, if salary is taxed
on due basis it is not gain taxable when it is received.
If salary is taxed on received basis it can not gain be
taxed on due basis.
Advance salary is taxable in the year in which it is
actually received. It is not gain taxable which is
become due.
Arrears of salary are taxable in the year in which it is
actually received if it was not taxed in the year in
which it was due.
Bonus taxable in the year which it is actually
received. It is not taxable in the year in which bonus is
due or bonus is declared.
Loan received by the employee from is employer is
liability of the employee & therefore it is not taxable,
however advance salary is taxable in the year in which
it is actually received.
Contribution made by central govt. in the account of
an employee under a new pension scheme effective
from 1- 4- 2004.
Definition of salary :According to section 17(1) salary includes Wages & salaries including advance of
Salary..
 Annuity or pension,
 Gratuity,
 Fees & commission.
 Perquisites,
 Profit in lieu of salary or in addition to
Salary or wages.
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
Payment received by an employee in
Respect of any period of leave not
Availed of by him, i.e. encashment,
 Annual accretion to the balance at the
Credit of an employee participating
In recognized provident fund to the extent
It is taxable, and
 Transferred balance in recognized provident
fund to the extent it is taxable.
In brief, salaried include wages, annuity or
pension, gratuity, fees and commission, perquisites,
profit in lieu of salary, leave encashment, and taxable
contribution /interest /transferred balance in a
recognized provident fund account. Since this is an
“inclusive” definition. The term salary would include
other items commonly understood to indicate salary
such as allowance, bonus, etc.
4.
PERQUISITES :-
A perquisite means any casual employments or benefits attached
to an office or position in addition to salary. Perquisite is personal
advantage or benefit derived by virtue of employment, office or position.
It is an incidental income from employment in addition to the regular
salary. Mere reimbursement of expenses dose not amount to perquisite
may be the cash or kind.
The definition of perquisites under sec.- 17 can be summarized as
follows :
A. Perquisites taxable in case of all employees
B. Perquisites taxable only in case of specified
Employees like directors etc. and
C. Perquisites not taxable at all.
A) Perquisites taxable in case of all employees:The following perquisites are taxable in the case of every
employees1. Value of rent-free accommodation provided by the employer.
2. Value of concession in rent in respect of accommodation
provided by employer.
3. Sum paid by the employer in respect of any obligation
payable by the assessee.
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4. Sum payable by the employer to effect an assurance on the
life of the assessee or to effect a contract for an annuity.
B)
Examples of taxable Perquisites:However this is not applicable to sum paid as employer
contribution toa) A recognized provident fund
b) An approved superannuation fund
c) A deposit linked insurance fund etc.
5. Value of any other fringe benefits or amenity.
The following perquisites are taxable in case of specified
employee1. Provision of motor car, reimbursement of maintenance and
running expenses on car or other vehicle.
2. Gas, electricity or water supply provided free of cost.
3. Free education facilities provided free of cost.
4. Free transport facilities for family members or employee.
5. Free domestic servant such as sweeper, watchmen, gardener,
and cook.
6. Payment of club bills.
C) Perquisites not taxable at all:Section 17 specifically provides that following are not
regarded as perquisites in any case1. Cost of medical treatment in a hospital maintained
by the employer, provided to an employee or any member of
his family.
2. Reimbursement of medical expenses incurred by employee
on medical treatment of him self or his family member in a
hospital maintained by the government or any local
authority or approved by government.
3. Any sum paid by an employer directly to a hospital,
approved by the chief commissioner of income- tax, for
medical treatment of the employee of his family member.
4. Reimbursement of medical expenses up to Rs. 15,000
incurred by employee on medical treatment of himself of his
family member in the previous year.
5. Premium on employee health insurance under any scheme
approved by the central government under sec. 36(1) (ib).
6. Premium on insurance (medi-claim) on the health of
employee or his family member under any scheme approved
for the purpose of sec. 80D.
7. Expenditure incurred by the employer on –
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a) Medical treatment of the employee or his family
member outside India.
b) Travel or stay abroad of the employee or his family
member of medical testament.
c) Travel and stay abroad of one attendant who
accompanies the patient in connection of such
treatment;
d) Provide that the gross total income of such an employee
dose not exceed Rs. 2,00,000 in the previous year.
e) To the extent permitted by the Reserve Bank of India.
f) Free education to children of employees at employer’s
educational institutes (up to Rs. 1,000 each)
5.
Profit in lieu of salary :-
The term profit in lieu of salary according to sec. 17(3) includes
the followinga)
Compensation for termination of employment :Normally compensation for termination of
employment, being a capital receipt is not taxable at all,
but section 17(3) has specifically provided that such
compensation would be taxable under the head salary.
However the following compensation are exempt as
provided under section 10(10B)
1. Retrenchment compensation to workers
Sec.[10(10B)]
2. Voluntary retirement compensation to
Employee [ sec.10(10C)]
b) Compensation for modification of the term and
conditions relating to employment.
c) Payment from employer or provident or any other fund
over and above the employee’s own contribution and
interest, exempt the following payment which are exempt
under sec.10
Gratuity
[sec.10(10)]
Communication of pension
[sec.10(10A)]
Payment from statutory or public provident fund [sec.10(10B)]
Payment from recognized provident fund [sec. 10(11)]
Payment from approved superannuation fund [sec10(12)]
House rent allowance
[sec.10(13)]
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These lump sum payments from unrecognized provident fund
to an employee an his retirement, over and above his own
contribution are taxable under this provision.
d) Receipt from Key-man insurance policy including bonus,
if any
6.
Annual accretion in recognized P. F. :-
Provident fund scheme provided for monthly contribution from the
employees as well as the employer to a provident fund account. The
balance to the credit of such account also earns interest. The entire
balance is paid to an employee on his retirement. The taxability of (1)
employer’s contribution (2) interest credited annually (3) balance paid
on retirement depends upon the type of provident fund. There different
types of provident fund such as (a) statutory P.F. (b) recognized P.F.
and (c) unrecognized P.F.
1. Statutory P.F. :- statutory P.F. means a fund set up and
administered by the government.
2. Recognized P.F. :- Recognized P.F. means fund set up and
operated by a privet sector employer and recognized by income-tax
department. These recognized provident fund etc. prescribed by the
income tax Act.
3. Unrecognized P.F. :- Unrecognized P.F. is a privet provident
fund set up and operated by an employer, not recognized by income tax
department due to non compliance of prescribed condition.
7.
Tax & provident fund :-
Amount
Employer
contribution
during previous
year
Interest credited
during previous
year
Lump sum
payment on
retirement
Statutory P.F.
[S.10(11)]
Recognized
P.F. [s.10(12)
Exempt
Exempt up to 12%
of basic salary;
Excess is taxable
Exempt
Exempt up to
9.5% p.a.
Excess is taxable
Exempt
Exempt subject to
rules
Employer
contribution &
interest taxable u/s
17(3)
Exempt
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Unrecognized
P.F.
[s.17(3)]
Exempt
Note :a) In all cases, employee’s monthly contribution to P.F.
deducted from salary, from part of the gross taxable salary, of
the employee.
b) Lump sum amount of employee’s contribution received on
retirement etc. is exempt in all cases.
c) Interest on employee’s contribution received in lump sump sum
on retirement from an unrecognized is taxable as income from
other sources.
d) If gross salary is given, ignore employee contribution. If net
salary is given then add employee’s contribution to net salary.
8.
Tax & provident fund :-
It is sum of money received but the employee from his employer in
addition to salary to wages.
Allowance
Condition
1. conveyance allowance/special Exempt to the extent spend for
Allowance/ traveling
official purpose.
allowance
(Received – Exempt)
2. city compensatory allowance
Fully exempt
3. Dearness allowance (D.A.)
Fully taxable
whether as per term of
employment or not as per term
of employment
4. High cost of living allowance
Fully taxable
5. Children education allowance
Exempt up to Rs. 100 per month per
(Actual exp. – Ignore)
children).
If 1 child (100 x 12=
1200). If 2 child (200 x 12= 2400).
(received – exempt = taxable)
6. Children hostel expenditure
Exempt up to Rs. 300 per month per
allowance
child (max. 2 children)
(actual hostel exp – Ignore)
Received – exempt= taxable
7. Leave travel allowance/
Actual expenses or 1st class A/C. rail
concession/ assistances
fair whichever is less is exempt or
actual expenses or air economy fair
whichever is less is exempt.
8. House rent allowance (HRA) Exempt subject to certain limits
(Received – Exempt= taxable)
9. Fixed medical allowance
Fully taxable
(actual medical exp. – Ignore)
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10. Uniform/ washing allowance
11. Tiffin/ Lunch allowance
12. Project allowance
13. Servant/ Peon allowance
14 Warden ship allowance
15. shift allowance
16. Daily allowance/ Helper
allowance/ Research
allowance
17. A) Transport allowance
For traveling between
Home and office
B) Transport allowance
In case of blind or
Orthopaedically handicap
Fully exempt
Exempt to the extent spent for such
purpose
(Received – exempt= taxable)
Fully taxable
Fully taxable
Fully taxable
Fully taxable
Fully taxable
Exempt to the extent spent for
official purpose.
Exempt up to Rs. 800 per month
exempt up to Rs. 1600 per month
Exemption :-
9.
a)
Gratuity [sec. 10(10) :Gratuity is a lump-sum amount paid to an employee, on the
basis of the duration of his employment, on termination of
service due to retirement, resignation, death etc. it is exempt
from tax either fully or partly, depending on the type of
employee receiving it. Gratuity received while still in
service is not exempt; it is taxable as salary.
Payment of gratuity Act
Non payment of gratuity Act
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1. Actual amount received
1. Actual amount received
2. Rs. 3,50,000/- constant
2. Rs. 3,50,000/- constant
3. 15/26 x last month
3. ½ x average salary of last
Salary x number of year’s
10 month’s x no. of
Completed in service or
Year’s completed in
Part thereof
Service
Lowest is exempt
Lowest is exempt
E.g.:Mr. Laxman retired from A.B.C ltd. After working 38 year’s and 8
month’s & received gratuity of Rs. 80,000 his month salary was
Rs. 3,200. calculate taxable gratuity (this covered under payment
of gratuity Act)
Particular
Amount Amount
Actual received 80,000
Less : exempt
72,000
Taxable gratuity
8000
W.N.Gratuity
1. Actual received
80,000
2. constant
3,50,000
3. 15/26 x last month salary x no. of
Years completed in service or
Part thereof
15/26 x 3200 x39 =
72000
Here given lowest exempt amount is 72000.
b)
Communication of pension [sec.10(10A) :Pension is the monthly payment of the ex-employer to an
retired employee. Which is taxed as “salary”. An employee may
opt to get a once-time lump-sum payment in lieu of such
monthly payments. This is known as communication of
pension, which is exempt fully or partly depend on the category
of the employee, as explained bellow.
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E.g.:Mr. Balaji retired from government service on 31st oct-07 & he
received pension of Rs. 3000 per month. Calculate the taxable
pension.
Particular
Amount Amount
Actual amount 15000
Less : exempt
15000
Taxable pension
c)
Encashment of leave salary [sec.10(10AA)] :-
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Leave encashment means cash received by an employee
against leave earned but not taken and accumulated. Leave
encashment while in service is taxable, leave encashment on
leaving a job (by retirement, superannuation, resignation etc.)
is exempt as explained above.
E.g.:Mr. Akash received leave salary from Balaji ltd. Calculated @
Rs. 10,000 for every month. Of leave to his credit on his
retirement on 31 – 3 – 2008. compute taxable amount of leave
salary on the basis of the following information.
a. period of service – 15 years & 6 months
b. earned leave entitlement – 2 months per year
c. earned leave taken in service – 3 months
d. average salary for 10 months ending 31 – 3 – 08 ,Rs.
10,000 p.m.
Solution :Calculation of leave encashment
Particular
Amount Amount
Actual received
2,80,000
Less : exempt
1,00,000
Taxable leave encashment
1,80,000
W.N. :Leave entitled = 15 ½ year x 2 months = 31 months
Actual leave balance on due of retirement = 31 month – 3 month
= 28 months
1. Actual leave salary received = 28 month x 10,000 = 2,80,000
2. constant
= 3,00,000
3. 10 x average salary of last 10 month = 10 x 10,000 = 1,00,000
Here lowest exempt amount is Rs. 1,00,000
d)
10.
Pension to gallantry award winner [sec.10(18)] :This exemption is in respect of the pension received by an
employee of the Central or State government who has been
awarded” Param Vir Chakra” or “Maha Vir Chakra” or such
other notified gallantry award.
What is deducted from salary :a) Deduction of entertainment allowance
[sec -16(ii)] :Entertainment allowance is initially included in gross
taxable salary.
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Thereafter, section 16 (ii) allows a deduction from salaries
only to government employees to the least of the following.
i) Actual amount received
ii) Constant Rs. 5000
iii) 1/5 of basic salary
lowest is exempt
a non-government employee is not entitled to any deduction
for entertainment allowance.
b) Professional tax [ sec. 16 (iii)] :Section 16 (iii) allows a deduction from salaries of the
amount of a tax on employment (i.e. Professional tax) levied by
or under any law by the state government under Article 276 of
the constitution.
COMPUTATION OF INCOME FROM SALRY
Particulars
Amount
Amount
Basic salary
Xx
Dearness allowance
XX
Bonus [receipt basis only]
XX
Arrears of salary [out standing]
XX
Advance of salary
XX
Gratuity
sec. 10(10)
XX
Pension
sec. 10(10A)
XX
Leave encashment sec. 10(10AA)
XX
Perquisites
XX
Allowances
Medical allowances
XX
Entertainment allowances
XX
Other allowances
XX
GROSS SALARY
Less : Deduction under sec. 16
I) Entertainment allowances u/s 16(ii)
II) Professional tax u/s 16 (iii)
NET SALARY TAXABLE
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XXX
XX
XX
XXX
XXXX