INCOME FROM

SALARY
BASIS OF CHARGE [SECTION 15]
-Salary due
- paid or allowed, though not due
- Arrears of Salary

DEDUCTION [SECTION 16]

-Standard deduction
- Entertainment Allowance
-Professional tax

MEANING [SECTION 17]

- Salary
-Perquisite
-Profits in lieu of salary
Salary

Salary is paid by the employer the employee in consideration of the service

rendered by him to the organization.

It includes monetary and non monetary value of benefits and facilities

provided by the employer.

Any amount received other than from employer cannot be termed as salary.
Salary u/s 17(1) - Includes

● Any Wages
● Any annuity or pension
● Any gratuity
● Any Fees, commission, perquisites or profit in lieu of salary
● Encashment of earned leave salary
● Employers contribution in excess of 12% of employee’s salary to ROF and
interest on RPF in excess of 9.5% p.a.
● Transferred balance from URPF to RPF to the extent which is taxable
● Contribution made by central government to the account of an employee
under Pension scheme referred to in Sec. 80CCD.
Characteristics of salary
1. Relationship of employer and employee - Individual firm, company, BOI , AOP,
HUF, state or central government, operating in India or abroad
2. No distinction between salary and wages
3. Nature of employer - Sole proprietor, HUF, Firm, Company, AOP/BOI
4. Salary from more than one employer
5. Salary from past, present and prospective employer
6. Tax free salary - include the tax paid by the employer also.
7. Salary received as a member of parliament or member of state legislature
8. Receipts from person other than employer
9. Place of accrual of salary income - accrued outside India taxable
Profit in lieu of salary

● Profits in lieu of salary are payments received by an employee in addition to

the regular salary.
● The profits in lieu of salary can include both monetary and other forms of
compensation.
● Profits in lieu of salary is taxable under the Income Tax Act and must be
declared while filing income tax return.
Basis of Charge [Section 15]
As per Section 15, Salary consists of the following:
• any salary due from an employer or former employer to an assesse in the previous year,
whether actually paid or not; (Normal Salary )

• any salary paid to him in the previous year by an employer or a former employer
though not due or before it became due to him. (Advance Salary)

• any arrears of salary paid to him by employer or former employer, if not charged to
income tax for any earlier previous year. (Arrears of Salary)
 Computation of Income from Salary
Salary XXXX
Allowances XXXX
Perquisites XXXX
Gross salary XXXX
Less: Deductions u/s 16 XXXX
Standard deductions 16(i) XXXX Standard Deduction
Entertainment allowance deductions 16(ii) XXXX Up to Rs. 50000/- or gross
salary whichever is lower
Professional tax 16(iii) XXXX
Income under the head ‘salaries’ XXXX

Professional tax –
deduction is allowed only if paid by employee in the PY.

If paid by the employer – first add to salary and then claim deduction
 SALARY

SECTION 17
[SEC. 17(1)]

PERQUISITE
SEC. 17(2)]

PROFITS IN LIEU OF SALARY

SEC. 17(3)]
Different forms of salary
Basic salary Taxable
Dearness allowance / pay Taxable
Advance salary Taxable in the year of receipt
Arrears of salary Taxable in the year of receipt
Leave encashment while in service Taxable
Leave encashment at the time of retirement
or leaving the job Taxable - Treatment
Salary in lieu of notice Taxable
Not taxable under the head salaries but
taxable under Profits and gains from
Salary to partner business or profession
Fees and commission Taxable
Taxable on receipt basis if not taxed earlier
Bonus on due basis
Gratuity Taxable - Treatment
Pension Taxable - Treatment
Annuity from employer Taxable as salary
RPF Taxable - Treatment
Retrenchment compensation Taxable - Treatment
Remuneration for extra duties Fully taxable under Section 15
VRS Taxable - Treatment
Salary from UNO Not Chargeable to Tax
Salary received by a teacher / researcher
from a SAARC member state Not taxable up to 2 years
Computation of Income from Salary

Salary XXXXXX
Allowances XXXXXX
Perquisites XXXXXX
Gross salary XXXXXX
Less: Deductions u/s 16 XXXXXX
Standard deductions 16(i) XXXXXX
Entertainment allowance deductions 16(ii) XXXXXX
Professional tax 16(iii) XXXXXX
Income under the head ‘salaries’ XXXXXX
Allowances

City compensatory allowances Fully taxable

House rent allowance Taxable treatment
Entertainment allowance Taxable treatment
Children education allowance in India Taxable treatment
Hostel expenditure allowance in India Taxable treatment
Transport allowance Taxable treatment

Allowance for transport employees Taxable treatment

Tribal area allowance Taxable treatment
Allowances
Travelling allowance, Conveyance allowance, Helper allowance,
research allowance, uniform allowance Taxable treatment

Transfer allowance Taxable treatment

Foreign allowance Taxable treatment

Tiffen allowance Taxable
Food Coupons/Lunch Allowance Taxable treatment
Fixed medical allowance Taxable
Allowance received by a teacher/ researcher from a SAARC
member state Not taxable upto 2 years
Sumptuary allowance to high court/ supreme court judge, chief
election commissioner or other election commissioner Not taxable
Perquisites
1. Rent free accommodation - furnished and unfurnished - furnished and unfurnished in
special cases or Concession in rent

2. Free domestic servants

3. Motor Car

4. Gas, Electricity or water supplied

5. Leave travel concession

6. Free education facility

7. Medical facilities

8. Sale of movable assets use of employer’s movable assets

9. Employee’s obligation met by employer interest free/concessional loans

10. Free transport

11. Lunch, refreshments

12. Tevelling, touring accommodation

13. Gift voucher or token

14. Credit card

15. Club

16. Specific security or sweat equity shares

17. Employer’s RPF, NPS

18. Pre requisite by a teacher/ researcher from a SAARC member state - Not taxable
upto 2 years

19. Telephone/ Mobile - Not taxable

Incomes to be included in gross salary
DIFFERENT RECEIPTS TAX TREATMENT
Wages/ remuneration/basic
Taxable
salary
Annuity from employer Taxable
Taxable on receipt basis if not taxed earlier on
Bonus
due basis
Salary in lieu of notice period Taxable
Fee and Commission Taxable
Overtime Payments Taxable
Taxable unless specific exemption is
Allowances
provided
Taxable in some specified
Retirement benefits
cases*

DA - paid by the employer to its employees as well as a pensioner to offset

the impact of inflation. It is fully taxable.
 Pension

Retrenchment
Gratuity
compensation

Retirement
benefits

Voluntary Leave
retirement encashment
Allowances

It is fixed monetary amount paid by employer to the employee in addition to salary

for meeting some particular expenses whether personal or for performance of his
duties.

They are generally taxable on receipt or due basis whichever is earlier unless
specific exemption is provided.
Fully Taxable allowances

•• Entertainment Allowance; Dearness Allowance; Overtime Allowance; Medical Allowance; City

Compensatory Allowance; Lunch/Dinner/Tiffin Allowance; Family Allowance; Warden
Allowance; Servant Allowance; Project Allowance Etc.

Partly taxable allowances

•• House Rent Allowance [Sec 10(13A)]

•• Special Allowances [Sec 10 (14)]

Fully exempt

•• Allowances to high court judges;

•• Allowances paid by United Nations Organization
•• Compensatory allowance received by judge of high court and supreme court
•• Sumptuary allowance given to judge of high court and supreme court
•• Allowance given to Govt employees outside India
•• Foreign allowance - Exempt if paid by Indian govt to Indian citizen for service outside India
House Rent allowance [ Sec 10 (13A) ]
● HRA is given by employer to employee to meet the expenses in connection with rent of the
accommodation which the employee might have to take for his/her residence.

● HRA given to an employee is exempt to the extent of minimum of the following:

Metro Cities (i.e. Delhi, Mumbai, Other Cities

Chennai, Kolkata)
1. HRA actually received 1. HRA actually received

2. Excess of Rent paid over 10% of salary 2. Excess of Rent paid over 10% of salary
i.e. (Rent paid – 10% of salary for relevant i.e. (Rent paid – 10% of salary for relevant
period) period)

3. 50% of the salary for the relevant 3. 40% of the salary for the relevant
period period
House rent allowance (HRA) - Note
1. Salary includes basic salary + D.A. (forming part of salary) + commission (if based on
%of turnover)

2. Exemption is not available to an assesse who lives in his own house or in house for
which he has not incurred the expenditure of rent

3. Relevant period means the period for which the said accommodation was occupied
the assesse during the previous year

4. Salary to be taken on due basis in respect of which rented accommodation is occupied

by the employee in the P.Y. Advance salary should be ignored.
SPECIAL ALLOWANCES [SEC. 10(14)]

● Granted to meet expenses incurred wholly, necessarily and exclusively in the

PERFORMANCE OF OFFICIAL DUTIES [SEC. 10(14)(i)]

● EXEMPT to the extent of the minimum of the following:

○ Actual Allowance Received

○ Actual amount spent for official purpose
SPECIAL ALLOWANCES [SEC. 10(14)]
● Granted to meet his PERSONAL EXPENSES [SEC. 10(14)(ii)]

● Either at the place where the duties of his office or employment of profit are
ordinarily performed by him or at the place where he ordinarily resides

● EXEMPT to the extent of the minimum of the following:

○ Actual Allowance Received
○ Specified limit
■ Actual expenditure in the above case has no relevance
Special allowance [ Sec 10(14) ]

● Under Section 10(14)(ii)

● Travelling Allowance
● Daily Allowance
● Conveyance Allowance
● Helper Allowance
● Academic Allowance
● Uniform Allowance
Special Allowance [ Sec 10 (14)(iii) ]

● Children Education allowance – Rs 100/- p.m. per child upto maximum of 2 children
● Hostel expenditure allowance - Rs 300/- p.m. per child upto maximum of 2 children
● Lunch Allowance - Free meals in excess of Rs. 50 per meal less amount paid by the
employee shall be a taxable perquisite

● Transport allowance (for the purpose of commuting between place of residence to

place of his duty) sdpeciified handicapped employees who is blind or deaf and dumb or
orthopedically handicapped - Rs. 3200/- p.m.

● Underground allowance – Rs. 800/- p.m

● Tribal area/Scheduled area allowance - Rs. 200/- p.m.

● Allowance for transport employees working in any transport system to meet his
personal expenditure during his duty performed in the course of running of such
transport from one place to another (differently abled)
● Least of the following
70% of such allowance
Or
₹ 10,000 p.m.
Whichever
is lower
● High altitude Allowance (armed forces)
○ 9000 – 15000 ft = upto Rs. 1060/- p.m.
○ Above 15000 ft = upto Rs. 1600/- p.m
 Gratuity

Received during the Received at the time of

service retirement or death

Employee of Govt / local

Fully taxable Other employees
authority

Covered under Not Covered under

Fully exempted gratuity act gratuity act
1972(POGA) 1972(POGA)
Entertainment Allowance – Treatment
Entertainment allowance received is fully taxable and is first to be included in salary
income under the head “Salaries” and thereafter a deduction is given only for
Government employees.

In the case of a non-Governmental employee entertainment allowances is not deductible.

Amount actually spent towards entertainment (out of entertainment allowance received) is
not taken into consideration.
Government Employees (Least of the following )

Rs. 5000 / -

20 percent of basic salary

Amount of entertainment allowance received during the previous year

 Treatment of Gratuity
COVERED UNDER PAYMENT OF GRATUITY ACT, 1972
Gratuity is exempt from tax to the extent of minimum of the following:
Particulars Amt Amt
Actual gratuity received XXXX
Less: Least of the following:
Actual Gratuity received XXX
₹ 20,00,000 20,00,000
15/26 * Last drawn salary * No. of Completed year of service
XXX XXXX
Taxable Gratuity XXXX

Last drawn salary = Basic pay + DA (Whether enters or not) + DP

No. of Completed year of service (less than 6 months ignored. More than 6 month
consider as 1 year
19 yrs + 5 months = 19yrs
15 days average for every completed year of service.
19yrs + 6 months = 19yrs 7 days in case of seasonal business
19yrs + 8 monts = 20yrs
Treatment of Gratuity
NOT COVERED UNDER PAYMENT OF GRATUITY ACT, 1972
Gratuity is exempt from tax to the extent of minimum of the following:

Particulars Amt Amt

Actual gratuity received XXXX
Less: Least of the following:
Actual Gratuity received XXX
₹ 20,00,000 20,00,000
1/2 * Average salary * No. of Completed year of service
XXX XXXX
Taxable Gratuity XXXX

Salary = Basic pay + DA (forming part of the salary) +DP + fixed %age of commission on turnover
No. of Completed year of service (less than 6 months ignored. More than 6 month consider as 1 year
19yrs + 5 months = 19yrs .
19yrs + 6 months = 19yrs
19yrs + 8 months = 20yrs
 Pension

Commuted pension Uncommuted pension

Government Non government Fully taxable

Fully With Without

Government
Non
exempted gratuity gratuity government

1/3rd of the pension 1/2 of the pension

 Leave Encashment /
Earned leave Salary

Received at the time of retirement or

Received during service
superannuation or otherwise

Non government
Fully taxable Government employee
employee

Note: In case of Leave

encashment after death - Fully Fully exempt Least of the following
exempt
Leave Unavailed = Leave allowed - leave availed
Leave allowed = No. of completed years of service X ( 30 days per year / 1 month)*
*Actual allowed by the employer or 30 days or 1 month, Whichever is less.

Least of the following

Maximum of Rs. 3,00,000/-
Actual leave salary received
10 months salary (on the basis of average salary of last 10 months preceding to the
retirement)
Cash equivalent of unavailed leave (based on last 10 months average salary ) to his
credit at the time of retirement
Earned leave entitlement cannot exceed 30 days for every year of actual service.
 Provident Fund
•• PF recognised by the commissioner of IT for the purpose of tax
Recognised exemption
Provident Fund •• Generally maintained by private companies

•• PF not recognised by the commissioner of IT for the purpose of tax

Unrecognised exemption
Provident Fund •• Contribution to fund is made by the employees of private and
unorganised sector

•• Any fund maintained as per PF act of 1925

Statutory
•• Generally maintained by employees of the govt & statutory
Provident Fund corporation

Public •• Any member of the public whether salaries or self employed can
invest in the PPF account and SBI and its subsidiaries and any
Provident Fund other nationalised banks
 Particulars SPF RPF URPF PPF

Employers Exempted upto 12% of To be ignored at the

Fully exempted Not applicable
Contribution employees salary time of contribution

Qualifies for
Qualifies for Qualifies for deductions Not Qualifies for
Employees deductions U/S
deductions U/S U/S 80C deductions U/S
contribution 80C
80C 80C

Fully exempted To be ignored in Fully exempted

Interest on PF Exempt upto 9.5% p.a
the year of credit

Fully exempted if the

employee has rendered
Refund from continuous service for 5
Fully exempted Fully exempted
provident fund years otherwise it is
deposit treated as refund from
URPF and accordingly
taxed
Perquisites
Monetary and non monetary benefits (either in cash or in kind) received by an
employee from employer in addition to the salary is known as perquisites or
perks.

Perquisites - definition
Sec 17(2) perquisites includes “any casual emoluments attached to an office in
addition to basic salary” & includes
1. value of rent free accommodation
2. value of concessional rent paid by an employer on behalf of employee
3. contribution to any fund other than RPF
4. value of any other fringe benefits or amenities
 Tax free
perquisites
Taxable in all
Perquisites
cases
Taxable
perquisites
Taxable in hands
of specified
employee only
 Rent Free Unfurnished accommodation

Government employee Note: Hotel accommodation more than 15 Non government employee
days on transfer from one place to another

Owned by
employer Hired by employer

As the rates
prescribed House Hotel Accommodation
by Population >25 lakhs accommodation
government = 15% of salary
Population 10 to 25 Least of the following Least of the following
lakhs = 10% of salary 15% of salary 24% of salary
Population < 10 lakhs or or
= 7.5% of salary
Rent paid by the Rent paid by the
employer employer
 Motor Car
Both for official and
Expense Fully personal
Ownership Fully personal
s met by official
<1.6 liters >1.6 liters
Aggregate of the following
• 10% of cost of car or actual hire charges
Not a Rs. 1800/- Rs. 2400/-
Employer • Running and Maintenance
perquisite p.m. p.m
• Driver salary
Employer (-) Amount collected from employee
Not a Aggregate of the following
Rs. 600/-
Employee perquisite • 10% of cost of car or actual hire charges Rs. 900/- p.m
p.m.
• Driver salary
Not a
Actual expenses incurred by employer Rs. 1800/- Rs. 2400/-
Employer perquisite
(-) amount collected from employee p.m. p.m
Employee
Not a
Not a perquisite Not a Not a
Employee perquisite
perquisite perquisite

Note: For all the above cases, ADD(+) Rs. 900/- p.m for driver salary if it is provided
List of Allowances/Perquisites/Deductions available to
salaried persons

https://taxguru.in/income-tax/list-allowances-perquisites
-deductions-salaried-persons.html
Least of the following
Maximum of Rs. 300000/-
Actual leave salary received
10 months salary (on the basis of
average salary of last 10 months
preceding to the retirement)
Cash equivalent of unavailed leave
(based on last 10 months average salary
) to his credit at the time of retirement
Earned leave entitlement cannot exceed
30 days for every year of actual service.