MODULE 2 - HEADS OF INCOME

1st HEAD - INCOME FROM SALARY

• To be taxable under the head salary it is important that there should exist between the payer
and the payee, the relationship of an employer and an employee. (master and servant
relationship). For eg. Salary income of a member of Parliament is not salary as it is received
from government of India which is not his employer.

• Commission received by a Director from a company is salary if Director is an employee of the

company or else it is charged either as business income or other sources based on facts of case.

• Any salary, bonus, commission or remuneration paid to a partner of a firm is charged under
PGBP as relationship of employer and employee does not exist here.

• Whether full time or part time employment does not make any difference.

• Voluntary payment: If employer gives gift to an employee in appreciation of his work then
generally it is not taxable but in few cases it may be taxed as perquisites. For eg. Bonus paid to
a football player after the world cup victory to mark an exceptional event. Payment made as a
gift in appreciation of the personal qualities of an employee, After retirement payment of
proceeds of a benefit cricket match to a great cricket player.

• Salary is chargeable on due or receipt basis, whichever is earlier.

• Sec 17 gives the definition of salary. Broadly it includes the following:

1. Basic salary

2. Fees, Commission and Bonus

3. Taxable value of cash allowances

4. Taxable value of perquisites

5. Retirement Benefits

• The following two deductions are allowed under Section 16 of the Act to arrive at the figure of
Net Salary:

1. Deduction for entertainment allowance – Section 16 (ii)

2. Deduction on account of any sum paid towards tax on employment –Section 16(iii).

HEADS TAXABILITY
Profits in lieu of salary Chargeable to tax as salary. For eg.
 Compensation due in connection with termination of
employment
 Compensation due to modification of terms of employment
 Payment due or received under Keyman insurance policy
(including sum allocated by way of bonus)
Advance Salary Taxable- Relief is available

Loan/Advance against Not taxable as salary

salary

Arrrears of salary Due or receipt basis, whichever is earlier- Relief is available

Annuity It is a sum payable in respect of a particular year

 Annuity received from present employer is taxed as salary
 Received from past employer is taxed as profit in lieu of salary’
 Received from person other than employer is taxed as IOS.
 SALARY COMPRISES OF

 BASIC SALARY
 ALLOWANCES
 PERQUISITES
 RETIREMENT BENEFITS

ALLOWANCES

• Allowance is a fixed monetary amount paid by the employer to the employee (over and above
basic salary) for meeting certain expenses, whether personal or for the performance of his
duties.

• For the purpose of tax treatment, we divide these allowances into 3 categories:

I. Fully taxable allowances

II. Partially exempt allowances

III. Fully exempt allowances

I. FULLY TAXABLE CASH ALLOWANCES:

 Dearness Allowance and Dearness Pay (DA & DP)
 City Compensatory Allowance / Interim Allowance
 Non practicing Allowance
 Overtime Allowance
 Servant Allowance
 Tiffin / Lunch/ Dinner Allowance
 Entertainment allowance
 Project Allowance
 Fixed Medical Allowance
 Warden Allowance
 Other allowances
 Any other cash allowance

(i) Dearness Allowance and Dearness Pay

As is clear by its name, this allowance is paid to compensate the employee against the rise in price
level in the economy. Although it is a compensatory allowance against high prices, the whole of it is
taxable. When a part of Dearness
Allowance is converted into Dearness Pay, it becomes part of basic salary for the grant of retirement
benefits and is assumed to be given under the terms of employment.

(ii) City Compensatory Allowance

This allowance is paid to employees who are posted in big cities. The purpose is to compensate the
high cost of living in cities like Delhi, Mumbai etc. However, it is fully taxable.

(iii) Tiffin / Lunch Allowance

It is fully taxable. It is given for lunch to the employees.

(iv) Non practicing Allowance

This is normally given to those professionals (like medical doctors, chartered accountants etc.) who are
in government service and are banned from doing private practice. It is to compensate them for this
ban. It is fully taxable.

(v) Warden or Proctor Allowance

These allowances are given in educational institutions for working as a Warden of the hostel or as a
Proctor in the institution. They are fully taxable.

(vi) Deputation Allowance

When an employee is sent from his permanent place of service to some place or institute on deputation
for a temporary period, he is given this allowance. It is fully taxable.
(vii) Overtime Allowance
When an employee works for extra hours over and above his normal hours of duty, he is given
overtime allowance as extra wages. It is fully taxable.

(viii) Fixed Medical Allowance

Medical allowance is fully taxable even if some expenditure has actually been incurred for medical
treatment of employee or family.

(ix) Servant Allowance

It is fully taxable whether or not servants have been employed by the employee.

(x) Other allowances

There may be several other allowances like family allowance, project allowance, marriage allowance,
education allowance, and holiday allowance etc. which are not covered under specifically exempt
category, so are fully taxable.

II. PARTIALLY EXEMPT ALLOWANCES

(i) HOUSE RENT ALLOWNACE - Sec 10(13A)

HRA is exempt from tax to the extent of least of the following:

a) House Rent Allowance actually received by the assessee
b) Excess of rent paid by the assessee over 10% of salary due to him
c) An amount equal to 50% of salary due to assessee (If accommodation is situated in
Mumbai, Kolkata, Delhi, Chennai) ‘Or’ an amount equal to 40% of salary (if accommodation
is situated in any other place).Salary for this purpose includes Basic Salary, Dearness
Allowance (if it forms part of salary for the purpose of retirement benefits), Commission
based on fixed % of turnover achieved by the employee (Variable commission).
(ii) Children Education Allowance
This allowance is exempt to the extent of Rs.100 per month per child for maximum of 2
children (grand children are not considered).
(iii) Children Hostel Allowance
Any allowance granted to an employee to meet the hostel expenditure on his child is exempt
to the extent of Rs.300 per month per child for maximum of 2 children.
(iv) LTA - Leave Travel Allowance – It is allowed twice in a block of 4 years .

III. FULLY EXEMPT CASH ALLOWANCES:

(i) Foreign allowance
This allowance is usually paid by the government to its employees being Indian citizen
posted out of India for rendering services abroad. It is fully exempt from tax.
(ii) Allowance to High Court and Supreme Court Judges of whatever nature are exempt from
tax. (Sumptuary Allowance)
(iii) Allowances from UNO organization to its employees are fully exempt from tax.
(iv) Compensatory allowance received by a judge

PERQUISITES
• Perquisites are defined as any casual emolument or benefit attached to an office or
position in addition to salary or wages like rent free house, facility of gardener, sweeper,
car provided by employer etc.

RETIREMENT BENEFITS
• These are provided to employees to meet his retirement expenses like PF, pension, gratuity,
leave salary etc.

STANDARD DEDUCTION
Standard deduction of Rs.50,000 pa. is given to all salaried employees by the government.
 SUMS

19. X, who resides in Calcutta gets Rs.25,000 as basic salary. He receives Rs.6,000 as HRA. Rent
paid by him is Rs.7,500. Calculate HRA exemtion.

20. From the following particulars, compute taxable salary of Mr.Xavier and tax liability for the PY
2019-20. He is employed in textile industry in Mumbai at a monthly salary of Rs.40,000. He is
entitled to commission of 1% on sales achieved by him, which were Rs.10 lacs per month. Also,
he received the following allowances from the employer during the PY:

Dearness Allowance Rs.20,000 per month which is granted under terms of employment and
counted for retirement benefits.
House Rent Allowance Rs.10,000 pm (Rent paid for house in Mumbai Rs.12,000 pm)
Children Education Allowance Rs.500 per month
Transport Allowance Rs.1,000 per month
Servant Allowance Rs.2,000 per month
City Compensatory Allowance Rs.3,000 per month
Professional Tax paid by him 200 pm

21. Sachin is working in a private sector company in Delhi. The following are his income details for
the year PY 2019-20.

Salary Income: Basic Salary Rs.30,000 pm

DA Rs.10,000 pm
City Compensatory Allowance Rs.5,000 pm
Education Allowance for 2 children Rs. 2,000 pm
HRA Rs. 12,000 pm
Transport Allowance Rs.4,000 pm
Medical Allowance 3,000 pm
Employer pays salary for the following : Watchman Rs.3,000 pm, Sweeper Rs.1,000 pm.
He pays professional tax Rs.200 pm. He resides in his own house.
Compute his Income from Salary and tax liability for PY 2019-20.