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Taxation Law Project
Taxation Law Project
LAW
RAILMAJRA
Taxation law
PROJECT REPORT ON
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ACKNOWLEDGMENT
I would like to express my special thanks of gratitude to my
Taxation Law professor Ms. Disha for their able guidance and
support in completing my project on Income under head
“SALARY” . She had been very kind and patient while
suggesting me the outlines of this project. Last but not least, I
would like to thank my friends who helped me a lot in gathering
information and guiding me from time to time in making this
project .
Thanks again to all who supported and helped me a lot .
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Introduction
Income tax is the kind of tax that is deducted from the income or earnings of an
individual in a financial year. Different types of incomes have different types of
taxes levied upon them. The Income-Tax Act, 1961 (hereinafter “the Act”) talks
about five types of incomes:
➢ Income from salary- which includes rate, register pension, etc. given by an
employer to the employee working under him.
➢ Income from house property- this type of income includes rent from any
property.
➢ Income from capital gains- This includes games from the sale of any capital
assets
➢ Income from business and profession- this includes income from any
business or profession like lawyer etc.
➢ Income from other sources- this includes income which is not covered under
the above heads for example remuneration lottery etc.
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Income from Salary
Income from salary includes
• Salary,
• Taxable allowances,
• Perquisites,
• Profits in lieu of salary, and
• Lawful deductions.
Salary also includes pension received by the person who himself or herself has
retired from the services. Sections 15 to 17 of the Income Tax Act, 1961 deals with
income from salary.
Salary
Salary is the income which the employer gives to the employee as a result of the
contract of services provided to him. An income shall be considered under the head
of salary which shall have ‘employer-employee’ relationship and ‘contract of
service’ instead of ‘contract for service’. Under the ‘contract for service,’ the
employer is not bound to pay, rather the employee offers service for consideration
like a freelancer whereas under the ‘contract of service’ it is the contract where the
employee is bound to work for the employer and the income received is called salary.
For the salary, there must exist a relationship of master-servant which means the
employee or servant is working under the direct supervision and control of the
employer or master. There must not exist a principal-agent relationship as the
principal issues instructions and the agent is not bound to carry out instructions given
by his master and take the decision in his own manner.
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Section 17(1)
Section 17(1) defines salary as including:
(i) wages;
(v) Any payment received by an employee in respect of any period of leave not
availed of by him;
(vii) The aggregate of all sums that are comprised in the transferred balance of an
employee participating in a recognised provident fund
(viii) 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;
Section 15
Section 15 lays the basis of the charge of salary under Income Tax as:
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Advance salary
If a salary is paid to the employee before it becomes due to him, it is called an
advance salary. It is taxable on the basis of receipt
Arrears of salary
If the salary is increased in the past and the difference is received on the past basis
then it is called arrears. It is taxable on receipt basis.
Exceptions to Salary
The following have been excluded from under the head of Salary:
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Taxable Allowance
Allowance is an amount received by an employee from an employer other than salary
which is for specific purposes. It is the monetary benefit given to the employee to
compensate his/her expenditure. The employers provide different kinds of
allowances to the employee working under him. Following are the allowances that
are taxable under the Act:
The exemption to the HRA is provided under section 10(13A) of the Act. The
exemption is provided on the following three basis:
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of money declines and this is because the employer provides allowances known as
dearness allowances to compensate the inflation and maintain the purchasing power
of the employee. Generally, dearness allowances do not have an exemption under
the Act but in the terms of retirement benefits, the dearness allowance provided with
the pension is exempted.
Other allowances
There are broadly three categories of allowances:
1. Fully-taxable allowances
2. Partly taxable allowances
3. exemption available to the extent of the amount spent
4. An exemption is granted in a fixed amount
5. Wholly exempted
Fully Taxable Allowance
The following types of allowances are fully taxable and are added in the gross salary:
• Dearness allowance
• City compensation allowance
• Entertainment allowance
• Tiffin allowance
• Cash allowance
• Project allowed
• Overtime allowance
• Fixed medical allowance
• Marriage allowance
• Family allowance
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• Interim relief allowance
• Special allowance
• Deputation allowance
Partly Taxable Allowance
To the extent of the amount spent
If the allowance is received under this category and the spent amount is lower than
the received allowance then the amount spent is taxable. Following are the
allowances taxable under this category:
• Travelling allowances
• Conveyance allowance
• Daily allowances
• Uniform allowance
• Research allowance
• Helper allowance
An exemption is granted in a fixed amount
If the amount is received under this category and the exemption is deducted then the
remaining amount is a taxable amount. For the amount which is to be taxed, there is
no relationship with the actual expenditure.
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Wholly Exempted Allowance
• Sumptuary allowance to the Judges of High Court and Supreme Court
• Allowance to employees of UNO
• Allowance to Government employees rendering service outside India
Perquisites
Perquisites are the benefits or the facilities provided by the employer to the employee
other than the salary. It is different from the allowance as under allowance the
employer pays to the employee on a monthly basis and the employee arranges for
himself to avail the facilities whereas in perquisites all the facility is provided by the
employer himself.
Characteristics of Perquisites
• Perquisites donate a personal advantage
• Perquisites can be given in cash or kind
• Perquisites are taxable only when the employer has provided these to
the employee[2]
• If benefits are given by the client to the professionals then it will be
considered as professional income
• Even if there is no agreement between the employer and the employee,
perquisites are still taxable.[3]
Section 17(2)
According to the provision, the following are considered perquisites:
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• Specified employees are the persons that qualify any one of the
following categories
• Director of the company, or
• Is an equity shareholder of 20% or more of the company, or
• Whose income under ‘salary’ exceeds Rupees 50,000 per annum after
deduction under Section 16
iv)Expenses of employee reimbursed by the employer
• Medi-claim
• Personal accident insurance
• Employees State Insurance
vi) Sweat equity shares allotted by the employer to an employee on the minimum
amount or free of cost, is taxable
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Section 17(3)
According to Section 17(3) of the Act, Profit in lieu of salary includes:
Exceptions
The following profits are exempted under the act:
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iii) An authority established under Central or state or province shall act
v) A cooperative society
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Deductions
To calculate the income chargeable under salaries the deductions are made in the
gross salary. The following deductions are reduced and the remaining will be called
the taxable salary under the Act:
Section 16
i) Standard Deduction
If any employee has paid any professional tax then it is deductible under this section.
If the tax has been already paid by the employee then it will be taxable as a facility
and thereafter allowed as a deduction of maximum Rs. 2,500.
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Conclusion
Tax is a compulsory contribution to the government which is taken for public
welfare. Thus, it is a personal responsibility of a person to pay the tax. Income Tax
is a direct tax which is to be paid from the income and earnings. Salary is the amount
paid by the employer to the employee working under him. However, this salary
includes not only the basic salary but many other benefits which are provided by the
employer other than the basic salary. All these are taxable under the Income Tax
Act. However, there are some exemptions which are not taxable. Once the gross
salary becomes taxable, a person can claim a deduction if it is covered under the
deduction from the salary head of the Act.
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BIBLIOGRAPHY:
REFERENCES
1. Justice Deoki Nandan Aggarwal v. Union of India, Civil Appeal no.
411 of 1982.
2. Commissioner of Income Tax v. Jawaharlal Nagpal, 1988 65 CTR MP
227.
3. Commissioner of Income Tax v. S.S.M. Lingappan, 1981 129 ITR 597
Mad HC.
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