INCOME FROM SALARIES

(Sec 15-17)
Meaning of Salary:
• Any remuneration paid by an employer to an employee in consideration of his services is called salaries. It

includes monetary value of those benefits and facilities, which are provided by the employer and are taxable.

• Income forming part of salary: They include basic salary, advance salary, fees, commission, bonus, taxable

value of cash allowances, perquisites and retirement benefits. Broadly, it includes:

• Basic salary

• Fees, Commission and Bonus

• Taxable value of cash allowances

• Taxable value of perquisites

• Retirement Benefits
 Head Salaries Defined
a) Any salary due from an employer or a former employer to an assessee
in the previous year whether paid or not

b) Any salary paid or allowed to him in the previous year by or on

behalf of an employer or a former employer though not due or before
it becomes due to him

c) Any arrears of salary paid or allowed to him in the previous year by

or on behalf of an employer or a former employer if not charged to
income tax for any earlier previous year
Characteristics

• Employer – Employee Relationship

• Salary from more than one Employer

• Salary from present, past or prospective employer

• Tax free salary (Gross Salary-TDS)

• Salary received as member of parliament or member of state legislature- Income from other

sources

• Receipts from persons other than Employer- Income from other sources

• Full time or Part time employment

• Place of Accrual of Salary Income

• Miss Ria receives 63,500 p.a as net salary, employed had deducted Rs
7,500 as employees contribution to RPF, Rs 1,300 p.a as tax deducted at
source and Rs 1,200 p.a as professional tax. During the year employer had
deducted Rs 2,500 towards the recovery of house building advance taken
by Miss Ria.

• Gross Salary= Net Salary + TDS + RPF contribution+ Professional Tax +

Recovery of House building

• 76,000
•Salary or pension received by UNO employees- Exempted
•Salary as Partner- Not taxable under Salary but taxable under the
head income from business or profession
•Payment received by legal heirs of a Deceased Employee- Not Taxable

•Voluntary Foregoing of Salary

•Advance Salary Received

•Salary in Lieu of notice

•Salary Grade/pay Scale

 Our former Prime Minister Rajiv Gandhi invited Mr. Sam Pitroda from
Unites States to India for developing our communication network of India
and assigned the position of Chairman of Telecom Commission. He was
ready to take the position without salary and our Prime Minister accepted
it. But since our prevailing rule/law does not permit the same he was
bound to take one rupee per month as salary and remaining amount he
surrendered to central govt and the salary so surrendered would be
excluded while computing his taxable income

(caclubindia)
Definition of Salary
• wages,
• any annuity or pension,
• any gratuity,
• any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages,
• any advance of salary,
• any payment received in respect of any period of leave not availed by him i.e. leave salary or
leave encashment,
• the portion of the annual accretion in any previous year to the balance at the credit of an
employee participating in a recognized provident fund to the extent it is taxable and
• transferred balance in recognized provident fund to the extent it is taxable,
• the contribution made by the Central Government or any other employer in the previous year
to the account of an employee under a pension scheme referred to in section 80CCD.
Basis of Charge (U/S 15)
•Chargeable to tax either on due basis or on receipt basis, which
ever is earlier

•However, where any salary, paid in advance, is assessed in the

year of payment, it cannot be subsequently brought to tax in the
year in which it becomes due

•If the salary is paid in arrears has already been assessed on due
basis, the same cannot be taxed again when it is paid.
If Naman draws his salary in advance for the month of
April 2021 in the month of March 2021 itself, the same
becomes chargeable on receipt basis and is to be
assessed as income of the P.Y 2020-21
If the salary due for March 2021 is received by Naman
later in the month of April 2021, it is still chargeable as
income of the P.Y 2020-21 on due basis
Allowances in Income From Salaries :

These are of three types

1.Taxable Allowances: Dearness allowance, Medical allowance, Servant

allowance, Warden Allowance, Family allowance, City Compensatory
allowance etc.

2.Allowances exempt upto specified limit: House rent allowances,

Entertainment allowance, Certain Special allowances, etc.

3.Fully exempted allowances: Foreign allowance, Allowance to High Court

/ Supreme Court Judges, Allowances from UNO
Salary Structure
• Basic Pay XXX
• Allowances(HRA, XXX
City Compensation, Lunch Allowance etc)
• Perquisites XXX
Total Salary XXX
Allowances 17(3)
Allowances are given in cash along with the Basic Pay by the
employer. Theses allowances are given to an employee to meet
specific type of expenditure or to help the employee to meet certain
type of expenses.
Allowances Categories

•A- Fully Exempted

•B- Fully Taxable
•C- Partially Taxable
A- Fully Exempted Allowances
a) Foreign allowance given by Govt. to its employees posted abroad is fully
exempted.
b) House rent allowance given to Judges of High Court and Supreme Court is fully
exempted.
c) Sumptuary allowance given to Judges of High Court and Supreme Court is fully
exempted
d) Allowance paid by UNO
e) Allowances to teacher or professor from SAARC member states
f) Allowances to member of union public Service Commission
B- Fully Taxable Allowances
1. Dearness Allowance(Pay), High Cost of living allowance

2. City Compensatory Allowance or Capital Compensatory Allowance

3. Lunch Allowance

4. Tiffin Allowance

5. Marriage Allowance

6. Family Allowance

7. Deputation Allowance
8. Wardenship Allowance
9. Non practicing Allowance
10. Project Allowance
11. Overtime Allowance
12. Fixed Medical Allowance
13. Entertainment Allowance
14. Water and Electricity Allowance
15. Servant Allowance
16. Holiday Trip Allowance
 C- Partially Taxable
1. House Rent Allowance
2. Entertainment Allowance for Govt. employees
3. Allowances covered u/s 10(14) official allowances
(i) Helper Allowance : Actual amount spent, Excess is taxable
(ii) Uniform Allowance: Actual amount spent, Excess is taxable
(iii) Academic Allowance : Actual amount spent, Excess is taxable
(iv) Conveyance Allowance: Actual amount spent, Excess is taxable
(v) Travelling or Transfer Allowance : Actual amount spent, Excess is taxable
(vi) Daily allowance
Exemption shall be the least of following two amounts
a) The amount of the allowance received
b) The amount actually spent
Allowances 10(14)(ii) Personal allowances

(vi) Any special allowance in the nature of Composite Hill compensatory Allowance or
High Altitude Allowance or Uncongenial Climate Allowance or Snow Bound Area
Allowance or Avalanche Allowance- exemption allowed up to Rs 300 p.m to 7,000 p.m

(vii) Any Special Compensatory Allowance in the nature of border area or remote area
or difficult area or disturbed area Allowance - exemption allowed up to Rs 200 p.m to
1,300 p.m

(viii) Transport Allowance – exemption up to 1,600 p.m and 3,200 p.m in case of
disability
(ix) Tribal Area Allowance exemption allowed up to Rs 200 p.m

(x) Any Running Allowance given to employees of transport sector, ( if he is not

receiving Daily allowance , it is exempted up to 70% of such allowance or Rs
10,000 p.m whichever is less)

(xi) Children Education Allowance- Rs 100 p.m per child maximum for 2 child

(xii) Hostel Expenditure Allowance- Rs 300 p.m per child maximum for 2 child

(xiii) Compensatory Modified Field Area Allowance -Exemption Up to 1,000 p.m

(xiv) Highly active Field Area- Exemption up to 4,200 p.m

(xv) Special Allowance in the nature of counter insurgency allowance
given to the members of armed forces operating in areas away from
their permanent locations for a period of more than 30 days-
exemption up to 3,900 p.m

(xvi) Underground Allowance given to coal mine workers- up to Rs 800

p.m

(xvii) Island duty allowances given to armed forces- exempted up to Rs

3,250
House Rent Allowance u/s 10 (13A)
When the employee is occupying a rented residential
accommodation, the amount of house rent allowance
received by him is exempt to the extent of least of the
following amounts:

HRA received XXX

-Exemption (XXX)
Taxable Amount XXX
a) 50% of the salary where residential house is
situated at Bombay, Calcutta, Madras or Delhi and
40% of the salary where residential house is situated
at any other place.
b) House Rent Allowance actually received
c) Amount of rent paid in excess of 10% of the
salary.

Least of the above is exemption

Perquisites
• Perquisite” may be defined as any casual emolument or benefit attached to an office
or position in addition to salary or wages.
“Perquisite” is defined in the section 17(2) of the Income tax Act as including:
(i) Value of rent-free/concessional rent accommodation provided by the
employer.
(ii) Any sum paid by employer in respect of an obligation which was actually
payable by the assessee.
(iii) Value of any benefit/amenity granted free or at concessional rate to specified
employees etc.
(iv) The value of any specified security or sweat equity shares
allotted or transferred, directly or indirectly, by the employer, or
former employer, free of cost or at concessional rate to the assessee.
(v) The amount of any contribution to an approved superannuation
fund by the employer in respect of the assessee, to the extent it
exceeds one lakh rupees; and
(vi) The value of any other fringe benefit or amenity as may be
prescribed.
Types of PERKS
A. Perks Exempted for all Employees
B. Perks Taxable for all Employees
C. Perks Taxable only for Specified Employees
A-I. Free medical facilities or reimbursement of medical expenditure :
Exemption under this section shall be allowed for treatment of self, wife, dependent children,
dependent parents and dependent brothers and sisters.

Medical Facilities in India (All are Exempted, subject to the conditions)

• If treatment was taken from a hospital maintained by employer

• If treatment is taken from a hospital maintained by Central, State Govt., local authority or a
hospital is approved by the government for the purpose of medical treatment of its
employees

• If treatment is taken in respect of prescribed diseases or ailments specified in Rule 3A, in any
hospital approved by the CCIT
• In case treatment is taken from a private or unrecognized hospital, the

benefit is exempted up to 15,000 p.a.

• In case employer, under a scheme approved by the Central Govt. pays

medical insurance Premium of employees

• In case any health insurance premium is paid by employer to General

Insurance Corporation under notified scheme (Mediclaim U/s 80D) to

insure the health of its employees and members of their families

• Medical facilities outside India
• If the employee or any member of his family goes outside India for treatment,
medical expenses paid or reimbursed by employer - Fully exempted but to the
extent it is permitted by the Reserve Bank of India.
• Expenses on the stay of the patient and one attendant paid or reimbursed by
employer- Fully exempted but to the extent it is permitted by the Reserve
Bank of India.
• Expenses incurred by employer on the travelling to the foreign country of the
patient and one attendant without including therein the said expenditure total
-Fully exempted provided gross income of the employee does not exceed Rs
2,00,000 p.a. without including therein the said expenditure
A-2. Free refreshment supplied by employer to its employees during office hours in office
premises.

A-3. Free meals given at remote area or offshore installation

A-4. Free recreational facilities provided by employer to its employees.

A-5. Provision of telephones including mobile phones given by the employer to employee to
facilitate the business of the employer.

A-6. Free education which is provided by employer from its own resources who is engaged in
such business provided value of such benefit does not exceed 1,000 p.m. per child.

A-7. Cost of refresher course attended by employee met by employer. In case employer meets
expenditure of higher education or training whether in India or abroad.

A-8. Any rent-free residential accommodation to Judges of High Court or Supreme Court
A-9. Goods sold by an employer to his employees at concessional rate. The amount of concession given.

A- 10. Free ration received by members of armed forces.

A-11. Perquisites allowed by Govt. to its employees posted abroad.

A- 12. Rent free house given to an officer of Parliament, a Union Minister, and leader of opposition in
Parliament.

A- 13. Conveyance facilities to Judges of Supreme Court and High Court.

A- 14. Free conveyance provided by employer to employees for going to or coming from place of
employment.

A-15. Any amount contributed by employer towards pension or deferred annuity scheme.

A- 16. Employer’s contribution to staff group insurance scheme.

A-17. Computers, laptops given to [no transferred] an employee for official / personal use.
A-18. Transfer of a moveable asset [computer, car or electronic items] without consideration to an
employee after such asset had been used by the employer for more than 10 years.

A-19. Interest free loan

In case total amount of all loans taken by an employee from his employer does not exceed Rs
20,000

• In case loan is taken for treatment of notifies illness [Aids, cancer, mental disorders, renal failure,
hemophilia] and no claim is received from insurance company .
In case any insurance claim is received, such amount shall be treated as loan and difference
between rate of interest charged by employer and rate fixed by SBI shall be taxable.

• In case loan is taken for any other purpose and rate of interest is equal to or higher than the rate
prescribed by SBI.
B. Perks Taxable For All Employees

B-1. Rent Free House [Section 17(2)(i) Rule 3(1)] for Computing
Salary Income as amended by notification No. 94/2009 dated
18-12-2009]
Before calculating the value of rent free house, following information
is collected
•Nature of employment : Govt., Semi Govt. or any other.
•Place where rent free house is provided :
•All cities, towns have been divided into 3 categories depending upon
their population as per census of 2001 as under—

1. All cities, towns having population exceeding 25 lakhs.

2. All cities and towns having population exceeding 10 lakhs but not
exceeding 25 lakhs.
3. All other cities, towns having population of 10 lakhs or less than 10
laths.
• Meaning of accommodation. It shall include a house, farm-house, flat, hotel accommodation, guest house, a
caravan, mobile home, ship etc.

• Exempted accommodation : For an employee who is working

• in remote area [an acre located at least 40 kms. away from city limits of a town whose population is up to
20,000 as per latest census] at mining site ; or at project execution site; or

• in offshore area [ there is no limit as regard to distance ] such accommodation shall be exempted.

• Value of rent free accommodation is not taxable, if rent free house has been provided to Supreme Court and
High Court Judges, Union Minister, Leader of Opposition and Official of Parliament.

• More than one accommodation : In case a person is allowed to retain more than one accommodation, for first
three months value of one such house having lower value shall be taxable. If such accommodation is retained
for more than three months thereafter value of both such houses shall be taxable.
• Hotel accommodation : An employee may be provided hotel accommodation (including motels, guest houses,
etc.) on his transfer. It is treated in following manner :

(a) If hotel accommodation is provided for a total period not exceeding in aggregate 15 days in a previous year, it
shall be fully exempted.

(b) If hotel accommodation is provided for a period exceeding 15 days the perk shall be taxable in following manner

(i) Calculated salary for rent free house as given below

(ii) Compute salary for number of days he stayed in the hotel

(iii) Calculate 24% of this salary

(iv) Compare it with actual bill paid by employer to the hotel for such accommodation;

• Whichever is less is taxable.

• Note. In case hotel accommodation is provided for more than 15 days then this perquisite is not taxable for first 15
days and it will be taxable for remaining days.
4. Nature of accommodation. Owned by Employer/Hired or leased by employer.
5. Meaning of Salary :
• For the calculation of value of rent free accommodation, the word ‘salary’
includes
• Basic salary, pay or wages.
• Dearness Pay, Dearness Allowance if term of employment so provide or it enters
into salary for calculation of value of service or retirement benefits.
• Commission.
• Bonus.
• Fees.
• Value of all taxable allowances.
• Any other monetary payment, which is chargeable to tax (by whatever name
called).
• Leave encashment of salary only if it pertains to the leave earned during the
previous year in which rent free house is provided to the employee.
• Medical facilities outside India
• If the employee or any member of his family goes outside India for treatment,
medical expenses paid or reimbursed by employer - Fully exempted but to the
extent it is permitted by the Reserve Bank of India.
• Expenses on the stay of the patient and one attendant paid or reimbursed by
employer- Fully exempted but to the extent it is permitted by the Reserve
Bank of India.
• Expenses incurred by employer on the travelling to the foreign country of the
patient and one attendant without including therein the said expenditure total
-Fully exempted provided gross income of the employee does not exceed Rs
2,00,000 p.a. without including therein the said expenditure
• Contribution to an approved superannuation fund by the employer 17(2)
Exempted up to Rs 1,50,000 p.a
• Obligation of employees met by employer
Gas and Electricity bills, income tax, professional tax, salary of domestic servants-
Value of perk= Amount spent by employer - Amount charged/recovered by
employer from employees
• Food or Beverage Facility
Value of perk= Amount spent by employer - Amount charged/recovered by
employer from employees
If these benefits during working hours- exempted
• Perquisite in respect of Gift Voucher
Up to 5,000 gift in kind is exempted, excess is taxable
Cash gift is taxable irrespective of the amount.
• Club Facility
Value of perk= Amount spent by employer - Amount charged/recovered by
employer from employees
Club used for office purpose- Exempted
Use of Moveable Assets
10% percent of the original cost of such asset
Transfer of Moveable assets to the employee
Electronic items- 50% p.a on w.d.v basis
Motor car or other conveyance- 20% p.a on w.d.v basis
Any other item- 10% p.a on w.d.v basis
Taxable value = [ Actual to the Employer – Normal wear and tear of the Asset – Any
amount paid by employee or recovered from him ]
Free Educational facilities
A. In case Educational Institution is not owned / maintained by the Employer
The taxable value of perquisite in this case would be the actual amount of
expenditure incurred by the employer in that behalf;
B. In case Educational Institution is owned / maintained by the Employer
The taxable value of perquisite in this case would be the cost of such
education in a similar institution in or near the locality.
Further if the employer, in addition to running an educational institution for
providing free education to the household of its employee, also bears the
cost of books, uniform, bus, etc. than such expenses should also
be added for determining the cost per child either separately in respect
of each child (if possible) or otherwise on a pro rata basis.
Motor Car

•Motor Car
•Owned by Employer
•Owned by Employee
Profits in Lieu of Salary
Gratuity u/s 10(10)

Gratuity is a collectable amount for an employee, paid as a gratitude by

the organization.

It is also known as the end of service benefits.

An individual who has worked in an organization for a minimum period of

5 years is eligible for this benefit.

This calculation is based on his/her average salary, dearness allowance and

number of years he / she worked in the organization.
• In case of Gratuity received by a Government Employee is fully exempt
• In case of Gratuity received by an employee where Employer is covered
by the Payment of Gratuity Act 1972

• In case of Gratuity received by an employee where Employer is not

covered by the Payment of Gratuity Act 1972
In case of Gratuity received by an employee where Employer is covered by the Payment of
Gratuity Act 1972

• last drawn salary x number of years in employment x 15/26

• Rs 20,00,000

• Actual Gratuity received

In case of Gratuity received by an employee where Employer is not covered by the Payment of
Gratuity Act

• Half months salary (average monthly salary of 10 months before he retires) for each completed
years of service.

• Rs 20,00,000

• Gratuity actually received

 Important Notes on Gratuity
A. Government Employees: A death cum-retirement gratuity received by
government employee is fully exempt
B. Non-Government Employees
B-1. Non-Government Employees covered under Payment of Gratuity Act 1972
• Salary includes: Basic Salary + D.A (whether enters or not)
• Whole life exemption limit: 20 lakhs
1. Gratuity received during service: Taxable
2. Gratuity Exemption only in case of employer-employee relationship
B-2. Non-Government Employees not covered under Payment of Gratuity Act
1972

1. Employees working in any shop or establishment in which less than

10persons are employed or were employed on any day of the preceding 12
months

2. Calculation length of service period: Only Completed years of service

3. Meaning of Salary: Salary + DA (Enters) + Commission Payable at a fixed

percentage

4. Whole life exemption limit: 20 lakhs

Pension u/s 10(10)
Pension is a retirement benefit. Since this is payable to an
employee or to his dependents by virtue of past employment,
this is taxed as salary in the hands of the employee.

Tax is deductible on pension income under section 192 of Income

Tax act on payment
Leave Salary
Status of Employee Nature of Leave Taxability
Encashment

Government/ Leave Encashment during It is chargeable to Tax.

Non-Government employee continuity of employment However relief can be taken
u/s 89

Government Leave Encashment at the It is fully exempt from tax

time of retirement/leaving under section 10 (10AA)(i)

Non-Government Employee Leave Encashment at the It is fully or partially exempt

time of retirement/leaving from tax in some cases
under section 10 (10AA)(ii)
Amount Received as leave Encashment XXX
Less: Amount Exempted (XXX)
Amount Chargeable to tax XXX
Exemption
1.Leave encashment actually received
2. 10 months “salary”
3. Cash equivalent of unavailed leave calculated on
the basis of maximum 30 days leave for every year of
completed service
4. Standard Exemption 3,00,000